This was taken from AGNR, but they strongly urge that you seek an attorney.
- When Are Conservation Program Payments Considered Taxable Income?
Cost-sharing conservation programs are one way to encourage farmers to partake in on-farm conservation efforts. Parties who utilize federal and/or state cost-share program to incorporate best management practices on leased farmland will have additional tax related considerations each year.
Generally, the payee of record (whomever signed up for the conservation program, either landowner or tenant) will receive a 1099 representing the income stemming from the cost-share funds. Typically cost-share payments will be considered income that must be reported to the IRS, however, in some cases cost-share funds used for improvements may be excluded from gross income.
IRS Code § 126 allows the exclusion of the cost-sharing payment from income if the payment is from an authorized list of programs,
- is for a capital expenditure (i.e. not an expense claimed as a deduction), does not substantially increase gross receipts from the property that was improved, and the Secretary of Agriculture certifies that the payment was made primarily for conservation purposes.
- An increase in annual income is substantial if it is more than 10% of the average annual income before the improvement was made or $2.50 times the number of affected acres.
