AgDM newsletter article, March 2006

More on handling CSP payments*

Neil Harl By Neil E. Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Emeritus Professor of Economics, Iowa State University, Ames, Iowa. Member of the Iowa Bar, 515-294-6354, harl@iastate.edu

On June 24, 2005, the Federal Register (at page 36,557) carried a Notice of Determination by the Secretary of Agriculture that payments under the Conservation Security Program, under criteria specified in the USDA regulations, are “. . . primarily for the purpose of conserving soil and water resources or protecting and restoring the environment.” The Secretary is charged with making such a determination in order for the payments to be eligible for the cost share exclusion available under federal income tax law. The Secretary of the Treasury is obligated to make a determination that the payments under the program do not increase “. . . substantially the annual income derived from the property.”

The Secretary of Agriculture, in the June 24, 2005 notice, proceeded to state that “. . . this determination permits recipients to exclude from gross income, for Federal income tax purposes, all or part of the existing practice, new practice, and enhancement activity payments under the extent allowed by the Internal Revenue Service.” However, as discussed in a November 18, 2005 Agricultural Law Digest article**, the exclusion provision is limited to “capital improvements.” Cost-share payments for the adoption of land-based structural practices should be eligible for the exclusion from income if the practice is a capital improvement.” Cost-share payments for the adoption or maintenance of management or vegetative practices would not be excludible from income nor would “existing practice, new practice, and enhancement activity payments” necessarily be excludible from income. Those payments are very likely to be reportable as ordinary income except to the extent the payments are for capital improvements.

The misleading statement in the June 24, 2005 Notice has contributed to the belief by some taxpayers, augmented by statements from Natural Resource Conservation Service offices, that perhaps the entire amount of CSP payments could be excluded from income.  That would only be possible if the entire payment amount were to be directed into capital improvements. Considering the nature of the CSP program, that is highly unlikely.

* Reprinted with permission from the December 16, 2005 issue of Agricultural Law Digest, Agricultural Law Press Publications, Eugene, Oregon. Footnotes not included.

** This article appeared in the January issue of the Ag Decision Maker newsletter Reporting Conservation Security Program payments.

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