Entering a 1099-G as farm income

[alexander6]

My wife received a sizable 1099-G grant from the state, with amount listed in box 6 (taxable grants).  The grant was issued to her and references the name of her farm business (she is a sole proprietor).  The grant was one of many issued to farms by the state for the purpose of improving food security through infrastructure improvements.  In this case, the grant was issued on a condition that she make a major renovation of the barn, including installation of cooler, bathroom, heating systems, wash pack, etc.  She completed the conditioned improvements prior to the end of year, and the cost of the improvements exceeded the amount of the grant.  My inclination is that the improvement should be treated as a capital asset, and its value depreciated over the life of the asset.  Had she not received a grant, this is certainly the way it would be handled, however, because she received the grant, I'm thinking the amount that is depreciated should be reduced by the amount of the grant.  In other words, only the net cost of the improvement would be depreciated.  My thinking is consistent with the "capital approach" described in IAS 20.  Others believe that the "income approach" would be appropriate.

Entering this grant in TurboTax seems awkward, and I'm having trouble and spending too much time on this.  I've searched some other threads and the suggestions for how to deal with it are varied and conflicting, and I think Intuit should address some resources to this situation, and update its software, such that its customers can handle this without so much difficulty.

One option would be for me to reduce the cost of the improvement by the amount of the grant, and simply report the net cost of the improvement as its basis.  The problem with this approach is that the IRS has been sent a copy of the 1099-G and apparently requires recognition of it on our tax return.  So, this option, although the one I'd like to use, does not appear to work within TurboTax.  It would be a "red flag".

Another option, and the one that I first followed, is to use the suggested path within TurboTax.  Here are the steps I followed:

1) Use the search box for "1099-g" and then click "Jump to 1099-g".  The software directs to the PERSONAL tab. 

2) Under Personal Income>Other Common Income>Other 1099-G Income, click the Start/Update button.

3) Answer Yes to the question about whether we received Government Payments (1099-G), and information about the recipient. 

4) Then, a key question arrives: "What Type of Payment Did You Receive?".  There are five options, including a) Taxable grant, b) Agricultural program payment, and three others.  As the 1099-G amounts are reported on box 6 as "Taxable grants", it seemed to me that it would be appropriate to enter the payment here as a Taxable grant. 

5) Enter the details on the 1099-G, including under the section "Payment Information" the amounts reported on boxes 2, 5, 6, 7, and 9.  In this case, there is only one amount reported, and it is on box 6, and that is where I report it. 

The net result of this option is that the grant amount is treated as personal income and is reported on Schedule 1, Part I, line 8z as "Other Income" - "Taxable Grant from Form 1099-G".  In this case, there is no way to directly deduct from this income the monies spent executing the project, and our income taxes would substantially rise this year as a result of this grant.  One benefit is that this grant income would not be subject to SE tax.  One workaround for this might be that the monies spent executing the project could be treated as an asset and (if allowed) wholly or partially written off in 2021, or alternatively depreciated over the life of the asset.  If wholly written off in 2021, this would have the effect of showing her farm income as a loss, which again isn't really appropriate.  Bottom line, this option would unnecessarily show a very high personal income and would show a corresponding loss on the farm income side.

A third option is similar to the second option, except that on step 5) instead of reporting the amount in box 6 as a taxable grant, report the amount in box 7 as Agricultural Payments.  Turbo Tax adds an additional step - "Indicate Payment Type" and I indicate Agricultural program payment.  It then asks to identify the source of this agricultural program payment, as either "a farm you operate" or "a farm or farm land you rent out".  I choose the former and pick the name of my wife's farm business.  The net result of this option is that it reports the income on Schedule F, and in our case because we use the accrual method, the amount is listed on Line 39a.  A related element of how to treat this option would be where to apply the expenses used in making the improvement.  I will attempt to place these expense in an asset, and write off this year the amount of the grant.  The remaining costs, those which exceed the amount of the grant, will be depreciated over time.  Overall, this seems to work, but I don't like the fact that the 1099-G shows this as Box 6 and that I have to enter it as Box 7 within TurboTax.

Seems like every year I have to find some workaround within TurboTax to deal with the particulars of our tax situation.  I wish I didn't have to work this hard at it.

[DianeW777]

The answers to your comments and/or questions follow.

1. Comment: Had she not received a grant, this is certainly the way it would be handled, however, because she received the grant, I'm thinking the amount that is depreciated should be reduced by the amount of the grant. 
   1. No.  The grant is taxable and therefore you do not reduce the cost of the improvements before listing the asset for depreciation. The taxable income becomes part of her cost basis in the improvement.
2. Comment: Had she not received a grant, this is certainly the way it would be handled, however, because she received the grant, I'm thinking the amount that is depreciated should be reduced by the amount of the grant. 
   1. Enter the full amount of the grant money by selecting Cash..... and directly entering the income from the Form 1099-G.  It is not a requirement for you to enter the form itself for the business income. There are several items that can be reported on the 1099-G, and in many different ways.  For this reason you should simply enter the income without using the form entry method.
3. This is a repeat of number 1. The asset should be listed at the full cost and not reduced by the amount of the grant. However there is a DeMinimis Safe Harbor option that may be used. Information is shown below for both real estate capital improvements and other assets.

Improvements Election

This election is an option you can take each year that lets you write off some building improvements as expenses instead of assets.

Here are the rules you need to meet to take this election:

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits: 
  • 2% of the unadjusted basis of your building or
  • $10,000

This election for building improvements is called the Safe Harbor Election for Small Taxpayers. If you decide to take this option, a form called Safe Harbor Election for Small Taxpayers will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2020? mark the Yes button and click Continue. 
2. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
3. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less. 
4. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision. 
5. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2020?
6. If you say Yes, you will be taken through the screens for the Improvements election.
7. If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets. 
8. On the Rental Summary screen go to the Expenses section and click on the Start/Update box. 
9. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished.  

De Minimis Safe Harbor Election - Other than real estate assets:

This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off/deduct items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

• You don't have an applicable financial statement (most people don't).
• You have a consistent process for how you record expenses and assets.
• You record these items as expenses on your books/records.
• The cost of each item as shown on your receipt is $2,500 or less.
• Business Tab > Business Income & Expenses > Edit > Other expenses > Other Miscellaneous Expenses
• Enter Description and amount (not entered as assets under this election)
• Note:  Because you are under the $2,500 threshold, you are not required to used section 179.  You can list these expenses under Miscellaneous.  If the amount was over 2,500, then you would enter these as assets and then would be able to choose the 179 option.
  • Maintain a complete record with your tax return should you need to verify these items at a later time.
  • Click the screenshot to enlarge and view

Credits for easier access for individuals with disabilities to enter and move about business establishments is different than for items that allow you to sell services to those individuals.

[alexander6]

Diane, I really appreciate your detailed response.  I will look at your suggestions in detail tonight, and may post back if I have follow up questions.  I probably should have indicated in my original post the values involved.  In this case the total cost of the improvement was about $263K.  The grant paid $219K.  The difference, or net cost, is $44K.  The unadjusted basis of the building (an old barn) is not more than $100K, so the improvement exceeds both $10,000 and 2 percent, and thus would not appear to be eligible for the improvements election.  Nor would it be eligible for the Section 179 deduction, as that deduction cannot be used for buildings.  If I enter it as non-residential real estate (39 year recovery period), the regular depreciation expense associated with this deduction will be very small for 2021.  If by contrast I enter it as 20 year farm building, which may be more appropriate, it looks like I can choose to write off the entire $263K using the special depreciation allowance.  It is apparently not an option to utilize the special depreciation allowance in a partial manner, say by taking an allowance of $219K that would directly offset the grant amount, and depreciate in the ordinary fashion over 20 years the remaining asset basis of $44K.

[alexander6]

Diane,

You wrote:

"1. Enter the full amount of the grant money by selecting Cash..... and directly entering the income from the Form 1099-G.  It is not a requirement for you to enter the form itself for the business income. There are several items that can be reported on the 1099-G, and in many different ways.  For this reason you should simply enter the income without using the form entry method."

Can you elaborate on which section within the software you are suggesting this entry be made, and any other particulars?

Al

[DianeW777]

Yes. If your wife is using Schedule F for farming activities then you can select 'Other Farm Income' as the category of income.

You are correct and have a good understanding of how both depreciation elections work. The Section 179 does not apply to this farm building and the Special Bonus depreciation must be used for the full amount eligible and you don't get to decide if you only want to use a portion of it.

You must decide based on your facts and circumstances considering what may or may not take place next year.  There are different thoughts by everyone, such as use what you can now and let next year take care of itself; or slow and steady wins the race by allowing a deduction each year assuming the income will be the same or higher. Then again a bird in  the hand is worth two in the bush.  This will all come down your your decision based on your situation.

[alexander6]

While I do very much appreciate it, the suggestion to report the 1099-G income within the Schedule F under "Other Farm Income" doesn't appear to be allowed by the TurboTax design and/or the IRS.  The screenshot below indicates that in this box, you are only to report other income that is "not reported on...Form 1099-G".  Are you suggesting to simply ignore this requirement, and enter it anyway?  If I follow this suggestion, the amount gets reported on Line 43 (we use accrual method of accounting) where it states explicitly: "Enter income (not reported on 1099)".  It doesn't seem right to me to enter the grant income here, because it WAS reported on 1099.

Related, I note on the Schedule F itself that another sub-line below and part of Line 43 is "From Forms 1099-G".  This seems like a good place to put the income, but the only way I can make the grant amount appear on this line is to enter it (in contradiction to what the 1099-G says) as Box 2/Box 8 "trade or business income".  Another option, and yet another fairly unsatisfying solution.  The 1099-G she received indicates Box 6 Taxable Grant.  Forcing TurboTax to enter this as Box 7 or Box 8 income is not right.

[JohnB5677 · Accepted solution]

To post a 1099-G for a grant to a farm in the Home & Business program go to.

1. Business > Continue 
2. I'll choose what I work on.
3. Select Farm Income & Expenses. 
4. Choose I have income from operating a Farm. Continue 
   1. (This answers the source of income that your question referred to)
5. Select your Farm
6. Scroll to Farm Income
7. Select Payments from Government Reported on 1099-G
8. Any 1099-G income > Yes
9. Continue the interview

Since this money will be taxed as income, you should not reduce the cost of improvements.  You can expense, or amortize as appropriate.

You will still have to post the income to box 7.  There is not an option for box 6, but the taxable outcome will be the same.

[mmonson]

This was super helpful - Thank you

[jerry7]

It's 2023 filing time and still have to fake it and enter on wrong ling to make it work. Is there an Intuit employee reading these threads?

[AmyC]

If you have farm income on a 1099-G, you enter it under farm income reported on a 1099-G. 

@jerry7