There’s two ways to go about this.
You can enter the 1099 – MISC form as you receive it. Then, go into the other income section and add an item of negative income that offsets the program payment. Give it a brief reason like “nontaxable conservation payment” or something similar. I have seen this method recommended by other experts including TurboTax employees, but it is hard for me to imagine that the IRS won’t send a letter asking what the heck are you doing reporting negative income.
The other option, which is suggested in the 1099 instructions, is to leave the 1099 off your return completely. Print your return and file by mail, and attach a copy of the 1099 and a written statement explaining why you have not included it as income. This method is slower because you can’t e-file, and it does not guarantee that you will not get an IRS letter, because the IRS might still want more information or they might lose the attachment. But it is the IRS suggested way of dealing with the issue.
