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 of 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.

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 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 from CCC loan payments you receive. Use Form W-4V, Voluntary Withholding Request. See chapter 21 for information about ordering the form.

To choose to report a CCC 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.

You must file the statement and the return by the due date of the return, including extensions. 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 6 months of the due date of the return (excluding extensions). Attach the statement to the amended return and write "Filed pursuant to section 301.9100-2" at the top of the return. File the amended return at the same address you filed the original return. Once you have made the choice, you can change it only with the approval of the IRS.

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 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 reported 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 his tax return on a calendar year basis. He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. In 2000, 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 2001, he repaid the loan and redeemed the cotton for $420 when the world price was $.42 per pound. Later in 2001, 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 included CCC loans in income in 2000.

Including CCC loan. Because Mike reported the $500 CCC loan as income for 2000, he is treated as if 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 2001 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 2001 on line 4 of Schedule F.

Excluding CCC loan. Mike has income of $80 from market gain in 2001. 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 2001 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 2001, 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 included CCC loans in income in 2000.

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 2001 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. 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 2001. 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 2001 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 on lines 6a and 6b of Schedule F. CRP payments are reported to you on Form CCC-1099-G.

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. You can choose to postpone reporting crop insurance proceeds as income until the year following the year the damage occurred if you meet all the following conditions.

• You use the cash method of accounting.
• You receive the crop insurance proceeds in the same tax year the crops are damaged.
• You can show you would have included income from the damaged crops in any tax year following the year the damage occurred.

To postpone reporting crop insurance proceeds received in 2001, 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 unless the IRS approves your request to change it. 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. 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 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 for a deductible expense in income, and you can take any offsetting deduction. (See chapter 6 for information on deducting soil and water conservation expenses.)
2. 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.
1. 10% of the average annual income derived from the affected property before receiving the improvement.
2. $2.50 times the number of affected acres.
3. 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 listed 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. If the three tests listed earlier are met, 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.
• The flood prevention projects under the Flood Control Act of 1944.
• The Emergency Watershed Protection Program under the Flood Control Act of 1950.
• Certain programs under the Colorado River Basin Salinity Control Act.
• 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 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 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.

1. 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. $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 rural abandoned mine program 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:

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 of 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 6 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 most other government program payments in income.

Fertilizer and Lime

Include in income the value of fertilizer or lime you receive 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.

Report the total amount reported to you as the payee of record on line 6a or 8a of your Schedule F. However, do not report as a taxable amount on line 6b or 8b any amount belonging to someone else.

See chapter 21 for information about ordering Form 1099-G.

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