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Rent based on crop or livestock sharing. If you are involved in a crop or livestock sharing arrangement with a tenant who does most of the work of operating the farm and you don't meet the special active participation test described below, you should report your income and expenses on Form 4835, Farm Rental Income and Expenses, instead of Schedule F. In that case, your net income from Form 4835 is carried over to Schedule E, Supplemental Income and Loss. It is treated like rental income and will not be subject to self-employment tax.
In order to use this form (and avoid self-employment tax on the income), you must not have materially participated in the activity. You did materially participate if you meet one of the following four tests:
- You do any three of the following four things: pay or stand good for at least half the direct costs of producing the crop; furnish at least half the tools, equipment, and livestock used in producing the crop; consult with your tenant; inspect production activities periodically.
- You regularly and frequently make, or take an important part in making, important management decisions.
- You work 100 hours or more spread over five weeks or more in activities connected with crop production.
- You do things which, considered in their total effect, show that you are materially and significantly involved in the production of the farm commodities.
Rent based on flat charge. Finally, if you rent cropland, farm buildings, etc. for a flat charge (rather than a percentage of the value of the yield produced by the tenant), report the activity directly on Schedule E, Supplemental Income and Loss. Again, net income from this type of activity will not be subject to self-employment tax.
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