Court Decision Effects Conservation Reserve

As a result of a recent U.S. Tax Court ruling, those who sign a Conservation Reserve Program contract, whether they are involved in a farm business or just own the land, will find their CRP payments subject to self-employment tax.

Previously, at least until 2003, self-employment tax on CRP payments was only enforced on those who were directly involved in a trade or business, and a non-farmer’s CRP income was not subject to self-employment tax, said Roger McEowen, director of the Center for Agricultural Law and Taxation and agricultural law professor at Iowa State University.

“The issue is that people who are not in a trade or business should not need to pay self employment taxes on CRP rents,” McEowen said. McEowen explained that even if someone just owns the land that is in the CRP and is not a farmer, the court says they will be charged the tax.

According the USDA’s website, the program pays landowners to halt all production on their environmentally sensitive lands to conserve and improve the quality of the land. The program is in place to help improve water quality, stop soil erosion and the loss of natural habitats. Landowners apply for the program by a bid to the USDA, who then accepts or denies the application. The participants then sign a 10 to 15 year contract. The court determined that the landowners participating in the CRP have the intent to make profit, and should be charged a self-employment tax.

“The court says that you are in the trade or business of creating environmentally friendly land and farms,” said McEowen. “Once you sign the CRP contract, the court states that you are in the trade or business of CRP and the CRP rents are subject to self-employment tax.”

With landowners being charged a self-employment tax, McEowen explained that when they apply their bids for the CRP, they would adjust their bids to incorporate the tax. The USDA will then have to pay more for the land to become a part of the CRP. Others may simply not participate in the CRP and cash lease the land to a farmer so that the cash rent income is not subject to self-employment tax.

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