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Center for Agricultural Law and Taxation
February 28, 2024 | Kristine A. Tidgren
As March 1 approaches, we review the estimated tax rules for farmers.
Generally, self-employed taxpayers are required to make quarterly estimated tax payments or pay a penalty. IRC § 6654(e)(1). A special rule applies to the payment of estimated tax by individuals who are “farmers” or “fishermen.” This special rule protects farmers—whose income is often unpredictable and sporadic—from the burden of attempting to calculate and make quarterly estimated tax payments. IRC § 6654(i).
Definition of “Farmers”
Calendar year taxpayers are qualifying “farmers” for purposes of this special rule if:
- The individual’s “gross income from farming” is at least 66 ⅔ percent of their “total gross income” from all sources for the taxable year OR
- The individual’s gross income from farming shown on the return for the preceding taxable year was at least 66 ⅔ percent of their total gross income from all sources
Publication 225 defines gross income from all sources as follows:
Publication 225 states that gross income from farming includes the following:
Note that 2023 is the first year that gains from the sale of depreciable farm equipment reported on Form 4797 has been included in the list of farm income in Publication 225. This is a welcome addition to the list since farmers who have traded equipment since 2018 have been required to recognize their gains in the year of sale.[1] Before 2018, equipment trades were subject to the IRC § 1031 like-kind exchange rules.
Quarterly Estimates Not Required for “Farmers”
Calendar year taxpayers who meet the definition of “farmer” under the above rules are exempt from a penalty for failing to pay estimated taxes if they meet one of the following requirements:
- They file their return and pay all tax due by March 1, OR
- Their income tax withholding will be at least 66 ⅔% of the total tax shown on their current year tax return or 100% of the total tax shown on their prior year return OR
- They make a single estimated tax payment by January 15 following the tax year.
Those who choose to make a single estimated tax payment by January 15 of the following tax year may file their return and pay the remainder of the tax due by the standard tax filing deadline, which is generally April 15. Qualifying farmers making one estimated tax payment by January 15 must pay the smaller of:
- 66 ⅔% of tax from current year, or
- 100% of the tax shown on the prior year’s return
Penalty for Failure to Pay Estimated Tax
Qualifying farmers who do not pay their required estimated tax by January 15 or file their returns and pay any tax due by March 1 may owe an underpayment of estimated tax penalty. Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, is filed to determine and pay the amount owed.
IRC § 6654(a) establishes that the penalty for underpayment of estimated tax equals the amount of the underpayment for the period of underpayment multiplied by the applicable underpayment rate, which is three percentage points above the federal short-term interest rate. Until April 1, 2022, this underpayment rate was 3%. IRC § 6621(a)(2). IRS determines this rate every quarter, but the rate that applies to a calendar-year qualifying farmer’s underpayment is the rate for the first quarter of the year following the tax year under which the tax liability arose. In this first quarter of 2024, this rate was eight percent, up one percent from 2023. In 2022, the rate was three percent.
Example - “Penalty” is an Interest Payment
Larry is a qualified farmer who did not pay estimated taxes by January 16, 2024, for 2023 (January 15 was a holiday). He also missed the March 1 deadline to file his return and pay his taxes to avoid the underpayment penalty. For 2023, Larry had $21,000 in overall tax liability. As a qualified farmer, his estimated tax liability was 66 ⅔ percent of that amount or $14,000. The due date for this tax was January 16. He files his return and pays the tax due on April 15, 2024. Because the underpayment rate for the first quarter of 2024 is eight percent, Larry owes an eight percent underpayment penalty for the proportion of the year for which his payment was delinquent, calculated as follows:
$14,000 (estimated tax liability) x 90/365 (days delinquent / days in the year) = $3,452 x .08 (underpayment rate) = $276.
[1] The prior list was derived from Rev. Rul. 63-26, which was modified by Rev. Rul. 80-366. Rev. Rul. 80-366 was obsoleted by Rev. Rul. 2004-90, most likely because the prior revenue rulings were based on IRC § 6073, which was repealed in 1984. No revenue rulings or regulations have issued guidance on gains from the sale of depreciable farm equipment under IRC § 6654. It should be noted that the Internal Revenue Manual does not include gains from the sale of depreciable farm equipment in its table of gross income from farming. (Source: Internal Revenue Manual Exhibit 20.1.3-4).
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