New Tax Implications of CRP Payments
Tuesday, October 8th, 2013
Editor’s Note: Because of the federal government shut-down, CRP payments may be delayed, but should continue when the government reopens.
The Conservation Reserve Program (CRP) pays landowners to remove land from active agricultural production and place the land in conservation programs that restore the land’s overall condition. Recent court rulings are changing the way that Conservation Reserve Program payments are taxed, and though the changes may seem somewhat minor, the tax implications can be substantial.
Since the CRP began, most payments that landowners received were treated as rental income for tax purposes, and rental income is generally not subject to self-employment tax. Recent, IRS court cases have found that landowners who receive CRP payments should pay self-employment tax on those earnings.
This summer, the United States Tax Court ruled in a case filed by South Dakota man Rollin Morehouse that changes how most CRP payments should be treated.
In that case, Morehouse inherited some farmland and then bought more. Some of the land was in the CRP, and Morehouse received CRP payments. Morehouse was not actively engaged in farming, but the IRS imposed self-employment taxes on the CRP payments that he received. Although he never actively engaged in farming, the court ruled in favor of the IRS, and required Morehouse to pay self-employment tax on CRP payments that he received.
One of the main facts that caused the tax court to rule in favor of the IRS was that Morehouse met the obligations of the CRP contracts. Basically, meeting the CPR requirements to conserve and maintain the land involved enough activity that Morehouse could be considered self-employed for tax purposes, the court found.
Let’s take a look at how this change can financially affect CRP payment recipients:
Let’s assume that John is a full-time banker and owns farmland. John decides to place all of his farmland in the CRP, and he receives a $10,000 CRP payment the first year. He didn’t have any expenses that offset the CRP income. Even though John is a banker by trade, he would still be required to pay 15.3% self-employment tax on the $10,000 CRP income in addition to his regular tax rate which increases his overall tax liability by roughly $1,530.
As with most rules, there is an exception. Under the 2008 Farm Bill, people who receive Social Security benefits are exempt from paying self-employment taxes on CRP payments. This exception covers all CRP recipients regardless of whether or not they actively farm. However, the 2008 Farm Bill has expired, so that may change.
For decades, the CRP has been a great incentive to conserve agricultural land. Although, in light of recent court rulings, it is safe to say that the benefits from CRP payments may now cost recipients 15.3% in self-employment taxes. While every situation is unique, the precedent set by IRS court victories is hard to ignore. To ensure that your CRP payments are handled properly, you should consult with your tax advisor to see how you may be affected.
Zach Veazey, CPA, is in the Tifton, Ga., office of Carr, Riggs & Ingram, LLC, and a member of the company’s agriculture team. He can be contacted at firstname.lastname@example.org