Are Agricultural Program Payments Taxable?

Agricultural program payments from government bodies like the U.S. Department of Agriculture (USDA) offer financial support to farmers and ranchers. These payments help manage market risks, promote conservation, and provide aid after natural disasters. Understanding the tax implications of these payments is a necessary part of farm financial management, as this guide will explain.

Common Types of Agricultural Program Payments

Conservation Programs

Conservation programs encourage practices that protect natural resources. The Conservation Reserve Program (CRP) is a prominent example where producers receive annual rental payments for taking environmentally sensitive land out of agricultural production. These contracts last for 10 to 15 years.

The Environmental Quality Incentives Program (EQIP) provides financial and technical assistance to integrate conservation practices into working lands. Unlike CRP, EQIP payments are cost-share assistance for implementing specific structural and management practices. Other programs, like the Conservation Stewardship Program (CSP), reward producers for maintaining a high level of conservation.

Commodity and Price Support Programs

A separate category of payments protects producers from market volatility. The Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs provide payments when crop revenues or prices fall below guaranteed levels. They are tied to specific commodities, such as corn, soybeans, and wheat.

The Commodity Credit Corporation (CCC) also makes loans to farmers using their crops as collateral. Market gain, which can occur when a farmer repays a CCC loan for less than the original loan amount, is another form of government payment that must be accounted for.

Disaster Assistance Programs

The federal government provides payments to help agricultural operations recover from natural disasters. These programs are often created in response to specific events like droughts, floods, or pandemics. For example, the Livestock Forage Disaster Program and the Livestock Indemnity Program compensate ranchers for grazing losses and livestock deaths.

In recent years, programs like the Coronavirus Food Assistance Program (CFAP) provided direct relief to producers facing market disruptions. These payments are intended to offset unexpected losses.

Tax Treatment of Government Payments

The general rule for agricultural program payments is that they are included in gross income for tax purposes. The IRS considers most payments from programs like ARC, PLC, and disaster relief initiatives as taxable income. This applies whether the payment is received as cash, materials, or services, as they are a substitute for farm income that would otherwise be earned and taxed.

A primary distinction in tax treatment involves the self-employment (SE) tax. The SE tax covers Social Security and Medicare taxes for individuals who work for themselves and applies to net earnings from farm operations.

Self-Employment Tax Implications

For an individual actively engaged in the business of farming, most government program payments are included in the calculation of net earnings from self-employment. This means payments from programs like ARC, PLC, and most disaster assistance are subject to SE tax and reported on Schedule F, “Profit or Loss From Farming.”

A different set of rules applies to landowners who do not materially participate in the farming operation. These individuals report farm rental income on Form 4835, “Farm Rental Income and Expenses.” Income reported on this form is not subject to SE tax, a distinction that is important for retired landowners or those holding farmland as an investment.

Conservation Reserve Program Payments

The tax treatment of Conservation Reserve Program (CRP) payments has unique characteristics. While they are called “rental payments,” the IRS does not classify them as rental income because the government does not use or occupy the land. For an active farmer, these payments are reported on Schedule F and are subject to SE tax.

There is a notable exception for individuals receiving Social Security retirement or disability benefits. For these taxpayers, CRP payments are not considered self-employment income and are therefore not subject to SE tax.

Cost-Sharing Exclusions

A significant exception to taxability applies to certain cost-sharing payments under Internal Revenue Code Section 126. A portion or all of a payment received for conservation-related capital improvements may be excluded from income. This exclusion applies if the payment is from a qualifying program, such as EQIP, and the Secretary of Agriculture certifies it was primarily for conservation.

To qualify, the payment must not substantially increase the annual income from the property. An increase is considered substantial if it is more than the greater of 10% of the average annual income from the affected land for the prior three years or $2.50 per acre. Any portion of the payment excluded from income cannot also be claimed as a depreciable basis in the asset.

How to Report Agricultural Program Payments

The primary document producers receive is Form 1099-G, “Certain Government Payments.” This form is issued by the paying agency, typically the USDA’s Farm Service Agency, and details the total amount of payments made to the recipient during the calendar year. It is an informational return sent to both the taxpayer and the IRS.

The Form 1099-G will report the gross payment amount in Box 6, “Taxable Grants.” This gross figure should be reported correctly on the tax return, with any necessary adjustments for excludable portions.

Reporting on Schedule F

For farmers who are actively involved in their agricultural business, the reporting destination is Schedule F (Form 1040), “Profit or Loss From Farming.” The total amount of agricultural program payments from Form 1099-G is entered on line 4a of Schedule F.

If a portion of the payment is not taxable, such as an amount qualifying for the cost-sharing exclusion, the taxable amount is reported on line 4b. The net income from Schedule F, which includes the taxable government payments, is then used to calculate income tax and self-employment tax.

Reporting on Form 4835

Landowners who are not materially participating in the farm operation use Form 4835, “Farm Rental Income and Expenses.” This form is designed for reporting farm rental income based on a crop or livestock share arrangement. Government payments associated with the rented land are reported on Form 4835.

The reporting process on this form mirrors that of Schedule F, with lines for gross agricultural program payments and the corresponding taxable amount. Net income from Form 4835 is carried to Schedule E, “Supplemental Income and Loss,” and is not subject to self-employment tax.

Timing and Receipt Considerations

The taxpayer’s accounting method governs when agricultural program payments are recognized as income. Most farmers use the cash method, meaning income is reported in the year it is received. However, the principle of “constructive receipt” can affect the timing.

Constructive receipt means income is taxable when it is credited to a taxpayer’s account or made available without substantial restriction, even if they have not yet taken possession of it. For example, if a government payment check is made available for pickup at the local FSA office in December, the income is considered received in that year, even if the farmer waits until January to collect it.

The accrual method of accounting requires income to be reported when it is earned, regardless of when it is received. A producer using the accrual method would recognize a government payment as income when all events have occurred that fix their right to receive it.

Some government support is provided not in cash but as “payments in kind” (PIK), such as commodity certificates or materials like fertilizer. The fair market value of these items is included in the farmer’s income in the year they are received and can be used.