Question: Jess is a cash basis farmer. She owns land that she uses for an active farming business. She entered into an agreement with another farmer to rent some of her land out to him for crops. As payment for the use of the land, they agreed that Jess will receive a percentage of the crops harvested from the land. She materially participates in the production and management of the farm and the crops grown by the leasing farmer. Jess receives her portion of the crops in late 2023 and will use the crops to feed her livestock in early 2024. She must include the fair market value of the crops received in her income. In what year should she include the crop shares in her income, and will that amount be subject to self-employment tax?
Answer: Jess will include the fair market value of the crops received in her 2024 income. Regardless of whether the farmer is cash or accrual basis, the crop shares received as rent must be included in income when the crops are deemed to be converted to cash or cash equivalents [Reg. 1.61-4(a) and (b)]. Because the crop share is used to feed her own livestock, the crop shares are deemed to be converted to cash and included in income at their fair market value when actually fed to the livestock (Rev. Rul. 75-11). Because she materially participates, the rental income received will be reported on her Form 1040, Schedule F and subject to self-employment tax.
