AgDM Whole Farm Legal and Taxes Current Issues, February 2006
Confusion over taxation of CSP payments
by Roger McEowen, associate professor of agricultural law, (515) 294-4076, member of KS and NE Bars and honorary member of Iowa Bar. mceowen@iastate.edu
Last summer, USDA published in the Federal Register a Notice of
Determination by the Secretary that all payments under the Conservation
Security Program paid to farmers could be eligible to be excluded from
income. Unfortunately, that statement is very misleading. To be excluded
from income, the payments must be for a capital improvement. Cost-share
payments for the adoption or maintenance of management or vegetative practices
are not excludible from income. Similarly, payments for "existing
practice," "new practice," or "enhancement activity" are not necessarily
excludible from income. Instead, those payments are likely to be reported as
ordinary income except, of course, to the extent the payments are for capital
improvements.
If there are expenses associated with payments that are not excludible
from income (because they are not for a capital improvement - a land-based
structural practice), they might be deductible as a soil and water
conservation expense if the taxpayer is engaged in farming (not a cash-rent
landlord). Also, the expense might also qualify to be deducted as an ordinary
farm expense.
This is becoming a critical issue this tax season. Unfortunately, the
USDA Notice has created tremendous confusion over the issue.
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