Tax Benefits of the Conservation Reserve Program for Farmers

Farmers who own highly erodible or certain other types of cropland can enter into a contract with the U.S. Department of Agriculture through the Conservation Reserve Program, agreeing to convert to a less intensive use of that cropland. In return, they receive rent or incentive payments that may have certain tax benefits. Cost-share payments may qualify for a cost-sharing exclusion and certain Conservation Reserve Program payments can be excluded from self-employment tax.

According to the U.S. Department of Agriculture Farm Service Agency, the Conservation Reserve Program is a voluntary program that agricultural landowners can sign up for. To be eligible, you must have owned and operated the land for at least 12 months prior to enrolment. The land must be cropland with a weighted average erosion index of 8 or higher, or can be acreage for a Conservation Reserve Program that is expiring, or that is located in a conservation priority area. The land can also be marginal pastureland that is suitable to be used as a riparian barrier or for similar water quality purposes.

The Conservation Reserve Program makes annual rental payments according to the agricultural rental value of the land, and assistance payments for up to 50% of your costs in establishing approved conservation practices. Contracts are from 10 to 15 years.

The rental and other incentive payments from the Conservation Reserve Program are reported as income on Schedule F. Cost-share payments may qualify for the cost sharing exclusion. You can exclude part or all of payments you receive for a government cost-sharing conservation, reclamation, and restoration program if the payment meets certain tests. The payment must be for a capital expense. If it is a payment for a deductible expense, you would report the payment as income and the corresponding expense as a deduction.

Also, to qualify for the cost-sharing exclusion, the payment you receive must not substantially increase your income from the property. According to the IRS, a substantial increase is the greater of 10% of your average annual income before the improvement or $2.50 times the number of acres affected. And the Secretary of Agriculture must certify that the payment was made primarily to conserve soil and water resources, protect or restore the environment, improve forests, or provide habitat for wildlife.

If you meet the conditions, you can exclude payments you receive for the Conservation Reserve Program or payments from various other conservation programs. If you are receiving social security benefits for retirement or disability, and any of your Conservation Reserve Program payments are taxable, that amount is not subject to self-employment tax. You can include that amount on line 1b of Schedule SE as a subtraction from your farm income subject to self-employment tax.

Sources:

Conservation Reserve Program, National Sustainable Agriculture Coalition

Conservation Reserve Program, Natural Resources Conservation Service

Conservation Reserve Program, U.S Department of Agriculture, Farm Service Agency

Publication 225, Farmer's Tax Guide, IRS

Schedule F, Profit or Loss from Farming, IRS