Do cost shares received from USDA for grass seeding on form 1099-G for the Conservation Reserve Program qualify for cost-share exclusion for income

[Redbird20]

I seeded native grasses and wildflowers for a Conservation Reserve Program contract with the USDA.  CRP Cost Shares is listed as income on form CCC - 1099-G.  I provided my own labor, tractor and rented a grass drill and purchased grass/wildflower seed.  I showed expenses for grass seed and drill rental in my 2015 tax return.  I did not show any expenses for labor or tractor use.  

[Cattlerancher · Accepted solution]

Unfortunately not. USDA Cost Share payments for seeding expenses are reported as Agricultural Payments on your schedule F and are taxable income.

I've attached a link to the IRS schedule F instructions for you to review. Please see page F-4, Lines 4a and 4b;

https://www.irs.gov/pub/irs-pdf/i1040sf.pdf

Cost-Sharing Exclusion (Improvements)

You can exclude from your income part or all of a payment you receive under certain federal or state cost­sharing conservation, reclamation, and restoration programs. A payment is any economic benefit you get as a result of an improvement. However, this exclusion applies only to that part of a payment that meets all three of the following tests.

1. It was for a capital expense. You can't exclude any part of a payment for an expense you can deduct in the year you pay or incur it. You must include the payment for a deductible expense in income, and you can take any offsetting deduction. See chapter 5 for information on deducting soil and water conservation expenses.

2. It doesn't substantially increase your annual income from the property for which it is made. An increase in annual income is substantial if it is more than the greater of the following amounts.

a. 10% of the average annual income derived from the affected property before receiving the improvement.

b. $2.50 times the number of affected acres.

3. The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.