Publication 225 |
2000 Tax Year |
Agricultural Program Payments
You must include in income most government payments, such as those
for approved conservation practices and production flexibility
contracts, whether you receive them in cash, materials, services, or
commodity certificates. However, you can exclude some payments you
receive under certain cost-sharing conservation programs. See
Cost-Sharing Exclusion (Improvements), later.
Report the agricultural program payment on the appropriate line in
Part I of Schedule F. Report the full amount even if you return a
government check for cancellation, refund any of the payment you
receive, or the government collects all or part of the payment from
you by reducing the amount of some other payment or Commodity Credit
Corporation loan. However, you can deduct the amount you refund or
return or that reduces some other payment or loan to you. Claim the
deduction on Schedule F for the year of repayment or reduction.
Dairy Refund Payment Program (DRPP) Refunds
The DRPP, administered by the Commodity Credit Corporation (CCC),
refunds the reductions in price received by eligible producers during
a calendar year. Milk processors, milk handlers, and others
responsible for the marketing of milk withhold the reductions in price
from their payments to the producers and send the withheld amounts to
the CCC. If the producer can prove that milk marketing for the current
year was not more than milk marketing for the prior year, the producer
is eligible for a refund of the reductions in price. Typically, an
eligible producer receives a refund of the reductions in price in a
year after the reductions occurred. Proper reporting of the refund
depends on whether the producer claimed the reductions in price as an
expense in the year they occurred. The following example shows how to
report refunds of reductions in price.
Example.
Sam Brown is a milk producer. He uses the cash method of accounting
and files his tax return on a calendar year basis. The marketing of
Sam's milk is subject to reductions in price. In 1999, Sam had gross
receipts of $200,000 from milk sales and had $3,000 withheld as
reductions in price. Sam proved that his 1999 milk marketing was not
more than his 1998 marketing. In 2000, Sam received a $3,000 refund
from the CCC of the 1999 reductions in price. Sam receives a 2000 Form
CCC-1099-G for the refund showing a "Milk Marketing
Fee" of $3,000.
Reductions claimed as an expense.
For 1999, Sam reported $200,000 of farm income from milk sales. He
claimed the $3,000 reductions in price as a farm expense in Part II of
his 1999 Schedule F. Sam received a tax benefit from the deduction
because it reduced his 1999 tax liability. Sam includes the $3,000
refund (milk marketing fee) as income in Part I of his 2000 Schedule
F.
Reductions not claimed as an expense.
For 1999, Sam reported milk sales income of $200,000, but did not
claim the reductions in price for his milk as an expense. Because Sam
received no tax benefit from the reductions in price in 1999, he does
not include the refund (milk marketing fee) as income for 2000. He
includes the $3,000 refund on line 6a of Schedule F, but does not
include it as a taxable amount on line 6b.
Commodity Credit Corporation (CCC) Loans
Normally, you do not report loans you receive as income, and you
report income from a crop for the year you sell it. However, if you
pledge part or all of your production to secure a CCC loan, you can
choose to treat the loan as if it were a sale of the crop and report
the loan proceeds as income for the year you receive them. You do not
need approval from the IRS to adopt this method of reporting CCC
loans, even though you may have reported those received in earlier
years as taxable income for the year you sold the crop.
Once you report a CCC loan as income for the year received, you
must report all CCC loans in that year and later years in the same
way, unless you get approval from the IRS to change to a different
method. See Change in Accounting Method in chapter 3.
You can request income tax withholding on CCC loan payments made to
you. Use Form W-4V, Voluntary Withholding Request.
See chapter 21
for information about ordering the form.
To make the choice to report a loan as income, include the loan as
income on line 7a of Schedule F for the year you receive it. Attach a
statement to your return showing the details of the loan.
When you make this choice, the amount you report as income becomes
your basis in the commodity. See chapter 7
for information on the
basis of assets. If you later repay the loan, redeem the pledged
commodity, and sell it, you report as income at the time of sale the
sale proceeds minus your basis in the commodity. If the
sale proceeds are less than your basis in the commodity, you can
report the difference as a loss on Schedule F.
If you forfeit the pledged crops to the CCC in full payment of the
loan, the forfeiture is treated for tax purposes as a sale of the
crops. If you did not choose to report the loan proceeds as income for
the year you received them, you must include them in your income for
the year of the forfeiture. If you chose to report the loan proceeds
as income for the year you received them, and the amount of the
forfeited loan is less than your basis in the commodity, you can
report the difference as a loss on Schedule F.
Market Gain
Under the CCC nonrecourse marketing assistance loan program, your
repayment amount for a loan secured by your pledge of an eligible
commodity is generally based on the lower of the loan rate or the
prevailing world market price for the commodity on the date of
repayment. If you repay the loan when the world price is lower, the
difference between that repayment amount and the repayment amount
based on the loan rate is market gain. You will receive a Form
CCC-1099-G showing the market gain you realized. If you
chose to include the CCC loan in income in the year you received it,
do not include the amount shown on Form CCC-1099-G in
income. The following examples show how to report market gain.
Example 1.
Mike Green is a cotton farmer. He uses the cash method of
accounting and files federal income tax returns on a calendar year
basis. He has currently deducted all expenses incurred in producing
the cotton and has a zero basis in the commodity. In 1999, Mike
pledged 1,000 pounds of cotton as collateral for a CCC price support
loan of $500 (a loan rate of $.50 per pound). In 2000, he repaid the
loan and redeemed the cotton for $420 when the world price was $.42
per pound. Later in 2000, he sold the cotton for $600.
The market gain on the redemption was $.08 ($.50 - $.42) per
pound. Mike received a Form CCC-1099-G from the CCC
showing market gain of $80 ($.08 x 1,000 pounds). How he reports this
market gain and figures his gain or loss from the sale of the cotton
depends on whether he chose to include CCC loans in income in 1999.
Including CCC loan.
Because Mike reported the $500 CCC loan as income for 1999, he is
treated as though he sold the cotton for $500 when he pledged it and
repurchased the cotton for $420 when he redeemed it. The $80 market
gain is not recognized on the redemption. He reports it for 2000 as an
"Agricultural program payment" on line 6a of Schedule F, but does
not include it as a taxable amount on line 6b.
Mike's basis in the cotton after he redeemed it was $420, which is
the redemption (repurchase) price paid for the cotton. His gain from
the sale is $180 ($600 - $420). He reports the $180 gain as
income for 2000 on line 4 of Schedule F.
Excluding CCC loan.
Mike has income of $80 from market gain in 2000. He reports it on
both line 6a and line 6b of Schedule F. Because his basis in the
cotton is zero, his gain from its sale is $600. He reports the $600
gain as income for 2000 on line 4 of Schedule F.
Example 2.
The facts are the same as in Example 1 except that,
instead of selling the cotton for $600 after redeeming it, Mike
entered into an option-to-purchase contract with Tom Merchant before
redeeming the cotton. Under that contract, Mike authorized Tom to pay
the CCC loan on Mike's behalf. In 2000, Tom repaid the loan for $420
and immediately exercised his option, buying the cotton for $420. How
Mike reports the $80 market gain on the redemption of the cotton and
figures his gain or loss from its sale depends on whether he chose to
include CCC loans in income in 1999.
Including CCC loan.
As in Example 1, Mike is treated as though he sold the
cotton for $500 when he pledged it and repurchased the cotton for $420
when Tom redeemed it for him. The $80 market gain is not recognized on
the redemption. Mike reports it for 2000 as an "Agricultural program
payment" on line 6a of Schedule F, but does not include it as a
taxable amount on line 6b.
Also as in Example 1, Mike's basis in the cotton when
Tom redeemed it for him was $420. Therefore, Mike has no gain or loss
on its sale to Tom for that amount.
Excluding CCC loan.
As in Example 1, Mike has income of $80 from market gain
in 2000. He reports it on both line 6a and line 6b of Schedule F.
Because his basis in the cotton is zero, his gain from its sale is
$420. He reports the $420 gain as income for 2000 on line 4 of
Schedule F.
Conservation Reserve
Program (CRP)
Under the Conservation Reserve Program (CRP), if you own or operate
highly erodible or other specified cropland, you may enter into a
long-term contract with the USDA, agreeing to convert to a less
intensive use of that cropland. You must include payments under the
program in your income, whether received in cash, commodity
certificates, or a combination of cash and certificates.
Crop Insurance and
Crop Disaster Payments
You must include in income any crop insurance proceeds you receive
as the result of crop damage. You generally include them in the year
you receive them. Treat as crop insurance proceeds the crop disaster
payments you receive from the federal government as the result of
destruction or damage to crops, or the inability to plant crops
because of drought, flood, or any other natural disaster.
You can request income tax withholding from crop disaster payments
you receive from the federal government. Use Form W-4V,
Voluntary Withholding Request. See chapter 21
for
information about ordering the form.
Choice to postpone reporting until the following year.
If you use the cash method of accounting and receive crop insurance
proceeds in the same tax year in which the crops are damaged, you can
choose to postpone reporting the proceeds as income until the
following tax year. You can make this choice if you can show you would
have included income from the damaged crops in any tax year following
the year the damage occurred.
To choose to postpone reporting crop insurance proceeds received in
2000, report the amount you received on line 8a of Schedule F, but do
not include it as a taxable amount on line 8b. Check the box on line
8c and attach a statement to your tax return. The statement must
include your name and address and contain the following information.
- A statement that you are making a choice under section
451(d) of the Internal Revenue Code and section 1.451-6 of the
regulations.
- The specific crop or crops destroyed or damaged.
- A statement that under your normal business practice you
would have included income from the destroyed or damaged crops in
gross income for a tax year following the year the crops were
destroyed or damaged.
- The cause of the destruction or damage and the date or dates
it occurred.
- The total payments you received from insurance carriers,
itemized for each specific crop and the date you received each
payment.
- The name of each insurance carrier from whom you received
payments.
One choice covers all crops representing a single trade or
business. If you have more than one farming business, make a separate
choice for each one. For example, if you operate two separate farms on
which you grow different crops, and you keep separate books for each
farm, you should make two separate choices to postpone reporting
insurance proceeds you receive for crops grown on each of your farms.
A choice is binding for the year. To request IRS approval to change
your choice, write to the IRS director for your area giving your name,
address, identification number, the year you made the choice, and your
reasons for wanting to change it. Call 1-800-
829-1040 if you need the address.
Feed Assistance
and Payments
The Disaster Assistance Act of 1988 authorizes programs to provide
feed assistance, reimbursement payments, and other benefits to
qualifying livestock producers if the Secretary of Agriculture
determines that, because of a natural disaster, a livestock emergency
exists. These programs include partial reimbursement for the cost of
purchased feed and for certain transportation expenses. They also
include the donation or sale at a below-market price of feed owned by
the Commodity Credit Corporation.
You must include these benefits in income in the year you receive
them. You cannot postpone reporting them under the rules explained
earlier for weather-related sales of livestock or crop insurance
proceeds. Report the benefits in Part I, Schedule F, as agricultural
program payments.
Include in income the market value of donated feed, the difference
between the market value and the price you paid, or any cost
reimbursement you receive. You can usually take a current deduction
for the same amount as a feed expense.
Cost-Sharing
Exclusion (Improvements)
You can exclude from your income part or all of a payment you
receive under certain federal or state cost-sharing conservation,
reclamation, and restoration programs. The "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.
- It was for a capital expense. You cannot 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 in income and take any offsetting
deduction. (See chapter 6
for information on deducting soil and water
conservation expenses.)
- It does not 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.
- 10% of the average annual income derived from the affected
property before receiving the improvement.
- $2.50 times the number of affected acres.
- The Secretary of Agriculture certified that the payment was
made primarily for conserving soil and water resources, protecting or
restoring the environment, improving forests, or providing a habitat
for wildlife.
Qualifying programs.
If the three tests above are met, you can exclude payments from the
following programs.
- The rural clean water program authorized by the Federal
Water Pollution Control Act.
- The rural abandoned mine program authorized by the Surface
Mining Control and Reclamation Act of 1977.
- The water bank program authorized by the Water Bank
Act.
- The emergency conservation measures program authorized by
title IV of the Agricultural Credit Act of 1978.
- The agricultural conservation program authorized by the Soil
Conservation and Domestic Allotment Act.
- The great plains conservation program authorized by the Soil
Conservation and Domestic Policy Act.
- The resource conservation and development program authorized
by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and
Domestic Allotment Act.
- The forestry incentives program authorized by the
Cooperative Forestry Assistance Act of 1978.
- Certain small watershed programs, listed later.
- Any program of a state, possession of the United States, a
political subdivision of any of these, or the District of Columbia
under which payments are made to individuals primarily for conserving
soil, protecting or restoring the environment, improving forests, or
providing a habitat for wildlife. Several state programs have been
approved. For information about the status of those programs, contact
the state offices of the Farm Service Agency (FSA) and the Natural
Resources and Conservation Service (NRCS).
Small watershed programs.
You can exclude payments you receive under the following programs
for improvements made in connection with a watershed.
- The Stewardship Incentive Program authorized by the Food,
Agriculture, Conservation, and Trade Act of 1990.
- The programs under the Watershed Protection and Flood
Prevention Act of 1954.
- The flood prevention projects under the Flood Control Act of
1944.
- The Emergency Watershed Protection Program under the Flood
Control Act of May 17, 1950.
- Certain programs under the Colorado River Basin Salinity
Control Act of 1974.
- The Wetlands Reserve Program authorized by the Food Security
Act of 1985 and by the Federal Agriculture Improvement and Reform Act
of 1996.
- The Environmental Quality Incentives Program (EQIP)
authorized by the Federal Agriculture Improvement and Reform Act of
1996.
- The Wildlife Habitat Incentives Program (WHIP) authorized by
the Federal Agriculture Improvement and Reform Act of 1996.
Income realized.
The gross income you realize upon getting an improvement under
these cost-sharing programs is the value of the improvement reduced by
the sum of the excludable portion and your share of the cost of the
improvement.
Value of the improvement.
You determine the value of the improvement by multiplying its fair
market value (defined in chapter 12)
by a fraction. The numerator of
the fraction is the total cost of the improvement (all amounts paid
either by you or by the government for the improvement) reduced by the
sum of the following three items.
- Any government payments under a program not listed
earlier.
- Any part of a government payment under a program listed
earlier that the Secretary of Agriculture has not certified as
primarily for purposes of conservation.
- Any government payment to you for rent or for your
services.
The denominator of the fraction is the total cost of the
improvement.
Excludable portion.
The excludable portion is the present fair market value of the
right to receive annual income from the affected acreage of the
greater of the following amounts.
- 10% of the prior average annual income from the affected
acreage. The prior average annual income is the average of
the gross receipts from the affected acreage for the last 3 tax years
before the tax year in which you started to install the
improvement.
- $2.50 times the number of affected acres.
The calculation of "present fair market value of the right to
receive annual income" is too complex to discuss in this
publication. You may need to consult your tax advisor for assistance.
Example.
One hundred acres of your land was reclaimed under a contract with
the Natural Resources Conservation Service of the USDA. The total cost
of the improvement was $500,000. The USDA paid $490,000. You paid
$10,000. The value of the cost-sharing improvement is $15,000.
The present fair market value of the right to receive the annual
income described in (1) above is $1,380, and the value of the right to
receive the annual income described in (2) is $1,550. The excludable
portion is the greater amount, $1,550.
You figure the amount to include in gross income as follows:
Value of cost-sharing improvement |
$15,000 |
Minus: |
Your share |
$10,000 |
| Excludable portion |
1,550 |
11,550 |
Amount included in income |
$3,450 |
Effects of the exclusion.
When you figure the basis of property you acquire or improve using
cost-sharing payments excluded from income, subtract the excluded
payments from your capital costs. Any payment excluded from income is
not part of your basis.
In addition, you cannot take depreciation, amortization, or
depletion deductions for the part of the cost of the property for
which you receive cost-sharing payments you exclude from income.
How to report the exclusion.
Attach a statement to your tax return (or amended return) for the
tax year you receive the last government payment for the improvement.
The statement must include the following information.
- The dollar amount of the cost funded by the government
payment.
- The value of the improvement.
- The amount you are excluding.
Report the total cost-sharing payments you receive on line 6a,
Schedule F, and the taxable amount on line 6b.
Recapture.
If you dispose of the property within 20 years after you received
the excluded payments, you must treat as ordinary income part or all
of the cost-sharing payments you excluded. You must report the
recapture on Form 4797. See Section 1255 property under
Other Gains in chapter 11.
Choosing not to exclude payments.
You can choose not to exclude all or part of any payments you
receive under these programs. If you make this choice for all of these
payments, none of the above restrictions and rules apply. You must
make this choice by the due date, including extensions, for filing
your return. If you timely filed your return for the year without
making the choice, you can still make the choice by filing an amended
return within six months of the due date of the return (excluding
extensions). Write "FILED PURSUANT TO SECTION 301.9100-2"
at the top of the amended return and file it at the same address you
filed the original return.
Production Flexibility
Contract Payments
If you receive production flexibility payments under the Federal
Agriculture Improvement and Reform Act of 1996, you must include them
in income for the year you actually or constructively receive them.
However, under a special rule, you are not considered to
constructively receive a payment merely because you have the option to
receive it in the year before it is required to be paid. You disregard
that option in determining when to include the payment in your income.
This special rule applies to any farm production flexibility payment
made under the 1996 Act as in effect on December 17, 1999.
For information on the constructive receipt of income, see
Cash Method under Accounting Methods in chapter 3.
Other Payments
You must include other government program payments in income as
explained below.
Fertilizer and Lime
Include in income the value of fertilizer or lime you received
under a government program. How to claim the offsetting deduction is
explained under Fertilizer and Lime in chapter 5.
Improvements
If government payments are based on improvements, such as a
pollution control facility, you must still include them in income. You
must capitalize the full cost of the improvement. Since you have
included the payments in income, they do not reduce your basis.
However, see Cost-Sharing Exclusion (Improvements),
earlier, for additional information.
Payment to More
Than One Person
The USDA reports program payments to the IRS. It reports a program
payment intended for more than one person as having been paid to the
person whose identification number is on record for that payment
(payee of record). If you, as the payee of record, receive a program
payment belonging to someone else, such as your landlord, the amount
belonging to the other person is a nominee distribution. You should
file Form 1099-G to report the identity of the actual recipient
to the IRS. You should also give this information to the recipient.
You can avoid the inconvenience of unnecessary inquiries about the
identity of the recipient if you file this form.
See chapter 21
for information about ordering Form 1099-G.
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