Conservation Reserve Program “Annual Rental Payments” and Self-Employment Tax
The United States Department of Agriculture (USDA) Conservation Reserve Program (CRP) is a voluntary conservation program administered by the Farm Service Agency (FSA) for land that has been used for farming or ranching. Taxpayers who are owners and operators of environmentally sensitive land enter into a 10 to 15 year contract under which they agree to implement a conservation plan. Typically, taxpayers agree to refrain from using the land for farming and ranching, to plant and maintain species to improve environmental quality, and to perform certain services to control weeds and pests. In exchange, taxpayers receive an “annual rental payment” for each year of the contract and cost-sharing payments for certain costs of carrying out the conservation plan. (See the USDA Farm Service Agency website for more information.)
CRP “annual rental payments” are not rental income for federal tax purposes
Although the payments are called “annual rental payments” for purposes of the CRP, these payments are not rental payments for federal tax purposes. Generally, a rental payment is an amount paid for the use or occupancy of property. Courts have held that the government does not use or occupy the land covered by a CRP contract. Morehouse v. Commissioner, 140 T.C. No. 16 (2013), appeal docketed, No. 13-3110 (8th Cir. Sept. 23, 2013).
CRP “annual rental payments” may be includible in net income from self-employment for purposes of the self-employment tax
Unless the taxpayer is receiving Social Security retirement or disability benefits, CRP “annual rental payments” are includible in net income from self-employment subject to self-employment tax. Note: Payments that are for the permanent retirement of cropland base and allotment history are not includible in net income from self-employment subject to self-employment tax because they are for the sale of section 1231 property or a capital asset.
Courts have held that CRP “annual rental payments” are not excludible from self-employment tax as “rentals from real estate” under § 1402(a)(1) of the Internal Revenue Code. Morehouse, 140 T.C. No. 16.
Where to report CRP payments on the federal tax return
Individuals must report all CRP payments on Schedule F, Profit or Loss From Farming, line 4a, Agricultural Program Payments. The amount of “annual rental payments” must be reported on line 4b, Taxable Amount, except to the extent it is for the permanent retirement of cropland base and allotment history (generally reportable on Form 4797, Sales of Business Property). The “annual rental payments” are not rentals from real estate and should not be reported on Form 4835, Farm Rental Income and Expenses, or Schedule E, Supplemental Income and Loss. The cost-sharing payments must be reported on Schedule F line 4b, Taxable Amount, unless they qualify for the cost-sharing exclusion. For more information about this exclusion, see the section titled Cost-Sharing Exclusion (Improvements) in IRS Publication 225, Farmer’s Tax Guide.