AgDM newsletter article, January 2006
Budget cuts could reduce the funding for conservation programs in the next federal fiscal year, but the long-term outlook is relatively bright for funds in support of conservation. Pressure from the World Trade Organization to cut trade-distorting commodity programs means that the agricultural sector will have to be stabilized with funding through other channels, notably conservation. Thus, conservation programs are expected to become increasingly important channels for government funds to the sector.
One of the problems in the conservation area is that neither the Congress nor the Internal Revenue Service has provided a clear roadmap on how conservation benefits are to be taxed. The assumption has been that income tax consequences of payments under the various conservation programs would be handled under existing federal law. Even the programs authorized by the 2002 farm bill are without guidance on how the benefits are to be taxed. Here’s how it appears that the existing federal income tax rules apply to the Conservation Security Program.
Conservation Security Program
The Conservation Security Program (CSP) has been a high profile conservation program since its enactment in 2002. The program provides for three tiers of conservation practices for which payments may be received.
Expected income tax consequences
Although no official guidance has been published to date (and a recent unofficial USDA statement seems wide of the mark as to income tax consequences), here are the expected income tax consequences -
It is anticipated that cost-share payments for the adoption or maintenance of management and vegetative practices will not be excludible from income. The exclusion provision is limited to cost-sharing for “capital improvements.” If there are expenses associated with such practices, those may be deductible as soil and water conservation expenses if the taxpayer is “engaged in the business of farming.” That would be a problem for cash rent landlords. It’s also possible that the expenses incurred could be deducted as ordinary farm expenses for carrying on the trade or business of farming.
Cost-share payments for the adoption of land-based structural practices should be eligible for exclusion from income if the practice is a capital improvement. That’s an election and those who don’t want to exclude the payments from income (for example, because it involves a 20-year recapture provision if the property is disposed of within that period) may elect out of the exclusion. Landlords, of all types, are eligible for the exclusion.
Annual payments otherwise should be treated as conservation reserve program payments have been handled --- as ordinary income and subject to social security tax. There’s still uncertainty over whether retired landowners would have to pay self-employment tax on the amounts received, based on two conflicting IRS rulings, one in 1988 and one in 2003. In a June 8, 2004 conference with the Commissioner and staff, the Commissioner provided assurance that an attempt would be made to harmonize the conflicting rulings. That has not occurred to date.
Several watersheds across the country have been approved for CSP contracts. More areas are expected to become eligible if funds are available. Guidance from IRS is critically important for those facing income tax reporting of payments under the program.
More Information in this article More on handling CSP payments.
* Reprinted with permission from the November 18, 2005 issue of Agricultural Law Digest, Agricultural Law Press Publications, Eugene, Oregon. Footnotes not included.
|Ag Decision Maker Home Page|