I participated in a cost sharing program (fuel reduction) to promote forest health on my 39-acre property called EQIP. Is the reimbursement considered taxable income?

[Fogrover]

The cost-share program is conducted by the Natural Resource Conservation Service, a division of the USDA. The reimbursement is about 50% of the actual cost of doing the work. Is the reimbursement considered taxable income? I found this on the internet. "Forest Health Protection Cost Share
The IRS has approved that the Forest Health Protection cost share program is eligible for income exclusion under Section 126 of the Internal Revenue Code (Revenue Ruling 2009-23, August 10, 2009, IRB 2009-32). This determination allows forest landowners to exclude part or all of the cost share payment(s) received under this program from their income provided they also meet the capital expenditure requirement under Section 126. Prior to this ruling, the payments were not excludable and were thus taxable as income for the taxpayer." Does it apply?

[Opus 17]

Well, here's the revenue ruling.

https://www.irs.gov/pub/irs-drop/rr-09-23.pdf

The code is here,

https://www.law.cornell.edu/uscode/text/26/126

The revenue ruling asks whether the FHPP qualifies as an excludable program under section 126(a), and the IRS answer is yes.

EQIP looks like a different program, with different goals.  But it seems to meet the same general principles and to qualify under 126(a)(8):

Any program of a State, possession of the United States, a political subdivision of any of the foregoing, or the District of Columbia under which payments are made to individuals primarily for the purpose of conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.

Then, you have to further look at the purpose of the payment, under the revenue ruling and section 126(b):

Under § 126(b), the excludable portion of a payment is limited to the portion that (1) is determined by the Secretary of Agriculture to be made primarily for the purpose of conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife, (2) does not increase substantially the annual income derived from the property, and (3) is not properly associated with a deductible expense.

So on the question of whether EQIP is covered by section 126(a)(8), I would suggest yes (based on my 30 second reading of one EQIP web site!!!).  But I am not a tax attorney.

Then, you can't exclude the payment as income if the forest management program helps you earn more money from your property.  And you can't exclude the payment from income if it is associated with a deductible expense.  Not sure what that would be on forest land, you are the expert there.  I will imagine for a moment that you need to replant an area, and replanting is normally a business deduction, so if you also get paid for replanting under EQIP, you have to count the payment as income.  Or, supposing that the government pays you to clear an area of mature trees to create a habitat for some creature that likes clearings, and you sell the trees.  You can't get paid tax-free and also take the income from the trees.  (Those might not be the best examples but hopefully you get the idea.)

Hope that helps. 

[Fogrover]

Thank you! Much appreciated. I now need to figure out how to account for the 1099 that I will receive in TurboTax and flag it as non-taxable income.

[Opus 17]

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.

[Fogrover]

Awesome! Option 1 is the one I will use! Thank you for your help.

[Len1935]

I received a grant from Oregon Dept of Forestry to clear forest land for animal habitat and fire suppression purposes. I rcvd a 1099-G from ODOF covering the grant , showing only the amount provided, with no opportunity to include off-setting expenses in carrying out the terms of the grant. These expenses involved payment of salaries, equipment costs, etc. There is no asset appreciation or profit involved. This was done at ODOF's request. Are these expenses (which are documented) deductible? And if so, where and how do I account for them?

[PattiF]

Please see this answer from Expert @RobertB4444:

So there are two ways to report an EQIP grant.   

In option one, you just don't report the grant.  If it is spent on improving the water and soil it isn't taxable and any expenses that it is spent on are not deductible.  So you just leave it off.

The other option is to report it using the 1099-G input and then enter an expense on the schedule F that generates that is exactly equal to the amount of the grant.  The expense should be called "Environmental Quality Improvements."  And it wipes out the taxable income.  

Either option is perfectly legit.  @Len1935 

[Fogrover]

I again in 2024 received a grant for fuel reduction on my property. I am reporting the income on a 1099-MISC and now I want to deduct the amount of the grant from my income because the grant money does not qualify as income according to 26 U.S. Code Section 126. Where would I do that on the 2024 tax return using TurboTax for 2024?

[DianeW777]

The deduction would be entered as a negative figure using the instructions below. The code language is provided in the link and the excludable portion is entered below for your convenience.

• US Code Section 126:Certain Cost Sharing Payments  
  • Excludable portion:   (1) In general The term “excludable portion” means that portion (or all) of a payment made to any person under any program described in subsection 
    • (a) which— 
      • (A) is determined by the Secretary of Agriculture to be made primarily for the purpose of conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife, and 
      • (B) is determined by the Secretary of the Treasury or his delegate as not increasing substantially the annual income derived from the property.

Other Miscellaneous Income:

1. Sign into your TurboTax Online account
2. Go to Tax Home (left panel)  Wages and Income  section
3. Scroll to  Less Common Income > Select  Miscellaneous Income, 1099-A, 1099-C
4. Select Other reportable Income > Enter a description (----) and the amount as a negative number (-100)*
   • * The amount on your 1099-MISC

@Fogrover 

[Fogrover]

Thank you. Your help is much appreciated.