Form 1040 Sch F - 100% Earned Income?

[David MacLennan]

As y'all know, Earned Income is defined in the Code as Net Earnings from Self-Employment, but only with respect to earnings in which the personal services of the taxpayer are a material income producing factor. I recall reading something several years ago with regard to a self-employed farmer's earnings. It may have been a PLR or some other IRS promulgation. The gist was that a farmer's income was only 30% earned income (or some similiar figure), because of the capital intensive nature of modern farming (I suppose this would change if he only owned a hoe and wheelbarrow, grew his own seed, and was w/o debt?). My fuzzy recollection was that this 30% number was a default used by the IRS, and not a deduced figure for a particular farmer. I now have a DB takeover case in which 100% Sch F income was used to generate AMC for 415, etc. Wondering if I should at least mention this issue in my takeover review. Any thoughts would be appreciated.

[Mary Kay Foss]

I'm doing this from memory rather than looking up sources so bear with me.

There used to be a maximum tax on earned income (pre 1986 Act) for that purpose there were limitations on how much of SE income from farms and small businesses was attributable to personal services. I believe that's where the 30% came from.

A number of years ago IRS came out with some proposed regulations regarding SE income. It's difficult to apply SE tax when there are general partnerships with investor partners or LLCs where not all owners are active in the business. Capital was one of the factors to be considered at that time. Those regulations were pulled and aren't even in proposed form anymore.

Schedule F, like Schedule C, needs some modifiying (the deduction for 50% of SE tax) but it is the base for retirement plan deduction contributions.