Starting with the 2010 tax year, the excess farm loss rules pose yet another possible limitation on the amount of loss a farmer can deduct. Farms affected by the excessive farm losses rule are those farms that are not C corporations that have received "applicable subsidies." An applicable subsidy is a direct or counter-cyclical payment received under the 2008 Farm Bill5or a payment that the farmer elected to receive instead of this type of payment. Any Commodity Credit Corporation loan is also considered an applicable subsidy. The disallowed excess farm loss is the amount of the year's farm loss in excess of the greater of:

  • $300,000 (or $150,000 in the case of a farmer with Married Filing Separately status)
  • Aggregate net farm income over the previous 5 year period

 

Example 3

Use the same facts as Example 1. During 2012, Fred received direct subsidy payments in connection with his farm. While the at-risk rules indicate that Fred can deduct the entire loss of $360,000 for 2012, he must also determine if the excess farm loss rules apply. Over the previous five years (2007 through 2011 inclusively), Fred had the following amounts of net farm income.

The excess farm loss rules place a limit on the amount of loss Fred can deduct for 2012. This limit is the greater of $300,000 or the total amount of net farming income Fred had for the previous five years (which is $325,000). Accordingly, Fred can deduct $325,000 of his $360,000 farm loss for 2012. The remaining nondeductible loss of $35,000 ($360,000-$325,000) is a suspended loss and carries forward to 2013. It will continue to carry forward from year to year until used.