Income From Other Sources

This section discusses other types of income you may receive.

Tax for Certain Children Who Have Un- earned Income. If your child was under age 19 (24 if a full-time student) at the end of the tax year and had unearned income of more than $1,350 but less than $13,500, this income will be taxed at the parent’s tax rate if the parent’s tax rate is higher than the child’s rate. For more information, see the Instructions for Form 8615.

Barter income. If you’re paid for your work in farm products, other property, or services, you must report as income the fair market value of what you receive. The same rule applies if you trade farm products for other farm products, property, or someone else’s labor. This is called barter income. For example, if you help a neighbor build a barn and receive a cow for your work, you must report the fair market value of the cow as ordinary income. Your basis for property you receive in a barter transaction is usually the fair market value that you include in income. If you pay someone with property, see Property for services under Labor Hired in chapter 4.

Below-market loans. A below-market loan is a loan on which either no interest is charged or interest is charged at a rate below the applicable federal rate. If you make a below-market loan, you may have to report income from the loan in addition to any stated interest you receive from the borrower. See chapter 1 of Pub. 550 for more information on below-market loans.

Commodity futures and options. See Hedg- ing in chapter 8 for information on gains and losses from commodity futures and options transactions.

Custom hire (machine work). Pay you receive for contract work or custom work that you or your hired help perform off your farm for others, or for the use of your property or machines, is income to you whether or not income tax was withheld. This rule applies whether you receive the pay in cash, services, or merchandise. Report this income on Schedule F. If you perform custom work activities that are more than incidental to your farming business, include the income and expenses from the custom work on Schedule C.

Easements and rights-of-way. Income you receive for granting easements or rights-of-way on your farm or ranch for flooding land, laying pipelines, constructing electric or telephone lines, etc., may result in income, a reduction in the basis of all or part of your farmland, or both.

Income you received for granting a temporary construction easement is rental income. Report the income as rent on Part I of Schedule E (Form 1040).

Example. You granted a permanent right-of-way for a gas pipeline through your property for $10,000. Only a specific part of your farmland was affected. You reserved the right to continue farming the surface land after the pipe was laid. Treat the payment for the right-of-way in one of the following ways.

1. If the payment is less than the basis properly allocated to the part of your land affected by the right-of-way, reduce the basis by $10,000. Report the payment as a sale on Form 4797, report the basis amount of land affected as a deduction, and include any excess amount as gain.

2. If the payment is equal to or more than the basis of the affected part of your land, reduce the basis to zero and the rest, if any, is gain from a sale. The gain is reported on Form 4797 and is treated as section 1231

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gain if you held the land for more than 1 year. See chapter 9.

The contract also contained a provision for a temporary workspace (temporary easement) to allow for the collection of topsoil and for equipment movement. This temporary easement is only for the construction period (usually a period of months). The gain is reported on Schedule E and does not affect the basis of the land.

Easement contracts usually describe

TIP the affected land using square feet.

Your basis may be figured per acre. One acre equals 43,560 square feet.

If construction of the pipeline damaged growing crops and you later receive a settlement of $250 for this damage, the $250 is income and is included on Schedule F. It doesn’t affect the basis of your land.

Fuel tax credit and refund. Include any credit or refund of federal excise taxes on fuels in your gross income if you deducted the cost of the fuel (including excise tax) as an expense that reduced your income tax. See chapter 14 for more information about fuel tax credits and re- funds.

Illegal federal irrigation subsidy. The federal government, operating through the Bureau of Reclamation, has made irrigation water from certain reclamation and irrigation projects available for agricultural purposes. The excess of the amount required to be paid for water from these projects over the amount you actually paid is an illegal subsidy.

For example, if the amount required to be paid is full cost and you paid less than full cost, the difference is an illegal subsidy and you must include it in income. Report this on Schedule F, line 8. You can‘t take a deduction for the amount you must include in income.

For more information on reclamation and irrigation projects, contact your local Bureau of Reclamation.

Prizes. Report prizes you win on farm livestock or products at contests, exhibitions, fairs, etc., on Schedule F, line 8. If you receive a prize in cash, include the full amount in income. If you receive a prize in produce or other property, include the fair market value of the property. For prizes of $600 or more, you should receive a Form 1099-MISC.

See chapter 12 for information about prizes related to 4-H Club or FFA projects. See Pub. 525 for information about other prizes.

Property sold, destroyed, stolen, or con- demned. You may have an ordinary or capital gain if property you own is sold or exchanged; stolen; destroyed by fire, flood, or other casualty; or condemned by a public authority. In some situations, you can postpone the tax on the gain to a later year. See chapters 8 through 11.

Recapture of section 179 expense deduc- tion. If you took a section 179 expense deduction for property used in your farming business and at any time during the property’s recovery period you don’t use it more than 50% in your business, you must include part of the deduc

tion in income. See chapter 7 for information on the section 179 expense deduction and when to recapture that deduction.

In addition, if the percentage of business use of listed property (see chapter 7) falls to 50% or less in any tax year during the recovery period, you must include in income any excess section 179 expense deduction you took on the property.

Both of these amounts are farm income. Use Form 4797, Part IV, to figure how much to include in income.

Refund or reimbursement. You must generally include in income a reimbursement, refund, or recovery of an item for which you took a deduction in an earlier year. Include it for the tax year you receive it. However, if any part of the earlier deduction didn’t decrease your income tax, you don’t have to include that part of the reimbursement, refund, or recovery.

Example. A tenant farmer purchased fertilizer for $1,000 in April 2024. He deducted $1,000 on his 2024 Schedule F and the entire deduction reduced his tax. The landowner reimbursed him $500 of the cost of the fertilizer in February 2025. The tenant farmer must include $500 in income on his 2025 tax return because the entire deduction decreased his 2024 tax.

Sale of soil and other natural deposits. If you remove and sell topsoil, loam, fill dirt, sand, gravel, or other natural deposits from your property, the proceeds are ordinary income. A reasonable allowance for depletion of the natural deposit sold may be claimed as a deduction. See Depletion in chapter 7.

Sod. Report proceeds from the sale of sod on Schedule F. A deduction for cost depletion is allowed, but only for the topsoil removed with the sod.

Granting the right to remove deposits. If you enter into a legal relationship granting someone else the right to excavate and remove natural deposits from your property, you must determine whether the transaction is a sale or another type of transaction (for example, a lease).

If you receive a specified sum or an amount fixed without regard to the quantity produced and sold from the deposit and you retain no economic interest in the deposit, your transaction is a sale. You’re considered to retain an economic interest if, under the terms of the legal relationship, you depend on the income derived from extraction of the deposit for a return of your capital investment in the deposit.

Your income from the deposit is capital gain if the transaction is a sale. Otherwise, it’s ordinary income subject to an allowance for depletion. See chapter 7 for information on depletion and chapter 8 for the tax treatment of capital gains.

Timber sales. Timber sales, including sales of logs, firewood, and pulpwood, are discussed in chapter 8.

Tree farmers, in the business of tree

TIP farming, may use section 631(a) to

capture favorable income tax treatment of timber sales and then report the actual cash

sale of timber on Schedule F. Section 2032A defines sale of trees as farm income (under the special use valuation for estate tax purposes). However, land owners who make frequent sales (for example, two to three within 5 years, per case law) may use Schedule F to report this business income.