| New Farm Bill Has Tax Implications |
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 Economics: July 2003 Other Economics Articles |
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by Dan Childs |
The farm bill, officially known as The Farm Security and Rural Investment Act of 2002, was signed by President Bush on May 13, 2002.
However, rules for various portions of the Act were still being finalized in May 2003. Even though all the rules may not be final at this time, it is evident that the early description of the Act as being the "greenest" farm bill ever is a reality. The bill being described as green means there is substantial money available through the many programs identified in the Act. Any time there is money received by a taxpayer engaged in the business of farming from a government program, there are generally income tax implications for the payment(s) received.
Many farmers who have received a crop base under the new farm bill will be receiving direct payments for crop years 2003 to 2007. Advance payments of up to 50 percent are authorized if a producer chooses to receive them. These advance payments can be made beginning December 1 of the calendar year before the year that the covered commodity is harvested. If an advance payment is elected, this amount would be included in income on Schedule F for that year. If a producer does not exercise the option to receive the payment in December of the year before, the payment would be included as income when received.
A producer may receive additional payments, referred to as countercyclical payments, if market prices for a commodity are low. A portion of this payment will be received in October of the year in which the crop was harvested, and the remainder of the payment will be received after February 1 of the year following harvest. These payments should be reported as income when received by the producer.
Marketing loans and loan deficiency payments under the 1996 FAIR Act are continued under the new Act. Money received from marketing loans can either be considered as a loan when received and the principal payments not deductible, or as income when received, depending on the producer's election. The loan deficiency payments are considered income when received.
Both direct and countercyclical payments as well as loan deficiency payments and marketing loans, if elected as income, are reported on Schedule F and are subject to federal income tax (and state tax for some states) and self-employment tax. The total of these taxes will approach 50 percent of the government payments received for some producers.
The conservation portion of the new farm bill has several programs available to landowners. Many of these programs are continuations from the 1996 FAIR Act but with more money available for approved practices. Payments can be received such that the government will reimburse landowners for a share of the cost for completing a practice that has been approved as a priority practice in the county where the land is located. These reimbursements for the most part are considered as income and are reported as part of the government payments received at the top of Schedule F. In most cases, the payments received will be more than offset by the expenditures for completing the approved practices. The actual expenditures can be greater because the programs are designed to reimburse only a portion of the total expense.
There is an IRS rule that has been around for a long time concerning expenditures for soil and water conservation expenses. The rule states that taxpayers engaged in the business of farming may treat expenditures for the purpose of soil or water conservation, in respect to land used in farming, as expenses and shall be allowed as a business deduction. The next part of the rules states that the amount of the deduction cannot exceed 25 percent of the gross income derived from farming during the taxable year. Any excess amount can be deducted in succeeding taxable years but cannot exceed 25 percent of the gross income from farming in any taxable year. Expenditures for conservation measures which are of a character that is subject to the allowance for depreciation are not included in the 25 percent limitation rule.
Another IRS rule that has been around for a while states that part or all of a payment received under specified federal or state cost-sharing programs may be excluded from the taxpayer's income under certain conditions. The only cost-sharing programs that qualify for the exclusion are Environmental Quality Incentives Program (EQIP), Wetlands Reserve Program (WRP) and Wildlife Habitat Incentives Program (WHIP). Under these programs certain eligibility requirements must still be met. These eligibility requirements include meeting three conditions:
- the government payment must be a cost-sharing payment for a capital expenditure,
- the capital expenditure for which the cost-sharing payment was made cannot substantially increase the annual income for the affected property, and
- the payment must have been certified by the Secretary of Agriculture as having been made primarily for soil and water conservation, environmental protection or restoration, improving forests or providing wildlife habitat. If these conditions are met, there is a formula to determine the excludable portion.
If you are a landowner and are considering implementing soil or water conservation practices, visit your local Natural Resources Conservation Service office to learn about the programs they have available.
A wise person once said "there are no free lunches." Such is the case with payments received by participating in the commodity and/or conservation programs of the new farm bill. This farm bill is "green," but there are tax implications for the benefits.