Conservation Cost Share Payments and Income Tax

The value to society, from the benefits of various conservation program improvements, may be much greater than the benefits received by the taxpayer. Therefore, federal and state governments have encouraged farmers and other landowners to apply conservation practices and improvements through cost share incentives. Would it be expected that these cost share monies be provided tax free? Such is not the case. In fact, the general rule is for government payments to be included as income and subject both to income and self-employment tax. However, cost share payments are generally offset by the deduction of associated expenses. This article will discuss appropriate deductions to be taken and even the possibility of exclusion from tax, under certain conditions, for conservation cost share payments.

First, expenditures related to soil and water conservation practices may be deductible as ordinary and necessary business expense if they were incurred in the course of a trade or business and were not an asset with more than one year of useful life. Examples of seed used for a cover crop or for a grass waterway, the fertilizer as well, would be deducted on Schedule F as seed and fertilizer expenses. A concrete manure storage structure or field drainage tile are examples of items that may be depreciated or considered for I.R.C. Section 179 Expensing. These expenses are otherwise deductible and are not eligible for the soil and water conservation deduction under I.R.C. Section 175 (line 14 on Schedule F).

Second, farmers and share rent landlords may deduct soil and water conservation expenditures for non-depreciable capital improvements that would ordinarily be added to the basis of the land. These expenses must be consistent with a NRCS conservation plan. Under the I.R.C. Section 175 provision examples of these deductions include: the movement of earth for such things as leveling, grading, contouring or restoration of soil fertility; construction, control or protection of drainage ditches, earthen dams, waterways, outlets or ponds; the eradication of brush or planting of windbreaks. The taxpayer’s deduction limit per year is 25% of the gross income from farming. There is no limit as to how many years that excess expense may be carried forward.

Third, part or all of the cost sharing payments that a farmer, share rent landlord or cash rent landlord receives may be eligible for an election to exclude form income under I.R.C. Section 126. A somewhat complicated provision, it may be useful to either a cash rent landlord not eligible for section175 treatment of expenses since they receive no share of the crop production, or to a farmer in a situation that the government payment exceeds the allowable depreciation for a capital asset in the year it was placed in service. I.R.C Section 126 excludes part or all of certain cost sharing payments made under approved state and federal programs, to an extent that they were made primarily for the purpose of conserving soil and water, protecting the environment, or improving wildlife habitat. Furthermore, it may not substantially increase the annual income derived by the taxpayer from the affected property. The amount of gross income that a taxpayer realizes upon the receipt of a section 126 cost share payment is the value of the section 126 improvement reduced by the sum of the excludable portion and the taxpayer’s share of the cost of the improvement. Taxpayers may be surprised at how little, if any, cost share money is included in income under this formula.

The fair market value of an improvement is not defined under I.R.C. Section 126 or in the regulation, rather there is an example in a treasury regulation. The example is an improvement that cost $700,000 but had a fair market value (what a willing buyer would pay a willing seller for the improvement) of only $21,000. In other words, this expense did not add much market value to the property, however remember who receives the environmental benefit. In effect, it is all those taxpayers living down stream. This fair market value is further reduced by fraction defined in the regulation to arrive at the “Section 126 Value.” This value is further reduced by the excludable portion which is the market value of the right to receive annual income equal to the greater of 10% of the average annual income derived from the affected acres for the last three tax years or $2.50 per acre times the affected acres. To determine the market value, the present value is calculated by dividing the annual income by a discount factor (interest rate) such as an Applicable Federal Rate or the Federal Land Bank interest rate used for special use valuation. An example would be as follows:

Value of the Section 126 Improvement   $90,000
Tax payers cost                                         – 25,000
Excludable portion *                                – 150,000
Amount of Cost Share included
as income                                                            $ 0

* The excludable portion example is:
10% of $300 (3 year average income) = $30 income per acre X 300 affected acres divided by 6% discount factor equals the excludable portion $150,000.

To report the Secton 126 exclusion, attach a statement to the income tax return including the following: The dollar amount of the cost funded by the government payment, the value of the improvement, and the amount to be excluded. Report the total cost share payment on Schedule F line 6a and the taxable amount on 6b.

More information is found in the IRS Publication 225, The Farmers Tax Guide. It should be obvious that the assistance of a competent tax accountant or practitioner may be essential to accurately determine the income tax implications from cost share payments. Many tax practitioners have received training on this subject at the Ohio Income Tax Schools sponsored by OSU Extension and the Land Grant University Tax Education Foundation, INC. However complicated tax regulations are, it still should not discourage farmers or landlords from participating in conservation programs to save soil and water or to protect the environment.

Utilizing Family Business Meetings

It is no secret that managing a family business has its ups and downs. Some family members may not have a desire to be involved in the business, while others want to understand and manage the business, but have never been given the opportunity to participate in making decisions. Utilizing family business meetings can help with making multi-generational businesses be successful.

To effectively work as a family team, it is important that business meetings be held because they can provide a vehicle for making important decisions that may impact several members. Although important for a number of reasons, sitting at the kitchen table during a meal is not a true business meeting. Consider the following as you make family business decisions.

Holding meetings in a business environment can enhance the quality of the meeting. If possible, meet in an office and limit telephone calls, distractions and other interruptions. If a kitchen table is used, be sure it is cleared of food and other items. Too often, meetings are held only when fires need to be extinguished. Pick a consistent time to meet and stick to the schedule. If the meetings are to be held the first Monday of the month, make it a habit to meet. If for some reason the meeting has to be cancelled, be certain it is rescheduled.

Be prepared. Take time to prepare an agenda of the items you intend to discuss and provide a copy to each person. Provide an opportunity for all family members to add items to the agenda prior to or at the start of the meeting. If there are any materials (financial records, building plans, etc.) that need to be used at the meeting, give the materials to members for review prior to the meeting. Prior to the start of the meeting make sure someone will take minutes of the discussion. Unless minutes are recorded, disagreements may emerge later about what decisions were reached.

What kind of decision-maker are you? Decisions that affect the business are important to all family members. Below is a listing of different decision-making styles.

Those who make decisions quickly without consulting others would be considered autocratic. This is the fastest and easiest way to make decisions, but the lack of ownership by everyone involved is a major disadvantage. This approach can be used if time is a constraint or individual parties don’t feel a need to contribute. A second style is democratic. In this approach a vote is taken and the majority wins and the minority looses. This may not be the best approach for small families, but sometimes may be the only viable alternative.

Consensus building is a third decision making style. In this approach, facts are used to outline the pros and cons of the decision. This style relies on the belief that those opposed will gravitate to the desired solution when given the right information. Finally, the most preferred method for making decisions is the collaborative style. Collaboration is a time consuming process, but is one that is best when major decisions must be made and the support of all affected members is needed.

If you are not already, I hope you will use this information to begin holding regular meetings with your family members. Do some self-assessment about your decision making style. Understand how your style is similar or different to those of your family members. These meetings can help to enhance communication and improve the performance of your business.

(Adapted from: Two-Generation Farming, Iowa State University, November 1998)

Fuel Saving Practices

Robert Grisso and Robert Pitman, Virginia Tech, have written an article that may be of interest to farmers looking for ways to save fuel. For the most efficient operation, a tractor’s engine should be operated near its rated capacity. However, there are many field operations (such as light tillage, planting, cultivating, and hay raking) that do not require full tractor power. This is especially true when older implements, which were sized for a smaller tractor, are used with higher horsepower tractors. This article describes a fuel saving practice to ‘Gear Up and Throttle Down’ for light drawbar loads. The article is available at:

What Are Farm Families' Priorities for Estate Planning?

During an estate planning workshop conducted in February, 2005, OSU Extension personnel surveyed twenty-eight participants to identify estate planning priorities. Participants in the estate planning workshop were asked to select their estate planning priorities from a list of twenty-seven objectives. Below are the results:

Top Ten Estate Planning Priorities for Farm Families (ranked according to participants’ order of importance):
1. Minimize estate taxes on estates of both spouses.
2. Minimize probate estate.
3. Provide security for surviving spouse.
4. Provide security for both spouses after retirement
5. Nominate agent in a durable power of attorney in case of disability
6. Assure continuity of farm or business
7. Minimize estate taxes on estate of first deceased spouse
8. Provide means of paying expenses of estate settlement, taxes and other debts
9. Take full advantage of the marital deduction
10. Keep business in the immediate family

These findings emphasize the importance that farm families place on minimizing taxes and probate. Not surprisingly, providing security for surviving spouse or both spouses after retirement ranked high. Clearly, participants also felt that having someone act as durable power of attorney in case of disability was important. Finally, transferring the farm business is still a high priority for farm families. Two of the top ten priorities are related to transferring the farm business, #6 and #10.

Navigating Volatile Commodity Markets

Recent grain and livestock markets feature more ups and downs than all the rides at Cedar Point. To help you navigate the market’s twists, turns, ups and downs, check out Matt Robert’s analysis of the grain markets (, Brian Roe’s overview of hog and beef markets ( and Cam Thraen’s look at the Dairy Markets (

Protecting Your Interests in Crop Insurance

Asian soybean rust will be covered by crop insurance if it occurs here in Ohio. In talking with some crop insurance representatives, there is still some confusion and concern over the vagueness of the definition of good farming practices. Information posted at offers the following definition:

Good farming practices – The production methods utilized to produce the insured crop and allow it to make normal progress toward maturity and produce at least the yield used to determine the Final Guarantee, including any adjustments for late planted acreage, which are: (1) for conventional or sustainable farming practices, those generally recognized by agricultural experts for the area; or (2) for organic farming practices, those generally recognized by the organic agricultural industry for the area or contained in the organic plan. We may, or you may request us to, contact FCIC to determine whether or not production methods will be considered to be “good farming practices.”

Insured producers should talk with their crop insurance agent about good farming practices if they are concerned about the impact of Asian soybean rust on their crop insurance indemnities. While disease is an insured peril under the Federal crop insurance program, damage due to the insufficient or improper application of disease control measures is not.

Insured producers should follow developments as to the identification and spread of Asian soybean rust disease, and continue to stay informed and updated concerning appropriate treatments that may apply to their situation. Appropriate treatment may vary from timing of application (pre- or post-discovery of the disease), frequency, and choice of chemical or other determining factors.

If crops become infected, discovery of the disease and any recommendations received regarding the application of appropriate control measures must be documented. In the event that rust develops in Ohio, farmers should follow these recommendations to protect their investment in crop insurance:

1. If the disease is found in their area, producers are expected to make their best possible effort to effectively treat for rust using accepted rust treatment practices. Farmers who do not treat for rust, or who make efforts to treat the disease too late, will not qualify for compensation under multi-peril crop insurance.

2. When making insurance claims, farmers should be prepared to verify that the cause of Asian soybean rust was natural and that available control measures were properly applied. Keep detailed records of dates and contacts associated with identifying the disease, ordering fungicides, and applying fungicides. This will assist in the verification that every effort was made to implement an acceptable treatment.

3. If an insufficient amount of rust control fungicide is available for effective control, the resulting loss of production would be covered. However, producers would need to show documentation that they attempted to order a fungicide and that the order could not be filled.

4. If a farmer is able to purchase a fungicide, but is unable to apply the treatment due to shortages in custom application services, loss of production would be covered. Damage resulting from the insufficient or improper application of rust control measures is not covered. If your sprayer is inadequate to apply the fungicide as recommended by the label, make sure you have documentation stating so from a reputable source.

For more information regarding good farming practices and crop insurance protection against Asian soybean rust, please see the crop policies area on the RMA website at

Your Access to Free Credit Reports

A recent amendment to the federal Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months.

A credit report contains information on where you live, how you pay your bills, and whether you’ve been sued, arrested, or filed for bankruptcy. Reviewing your credit report is important for several reasons:

• because the information it contains affects whether you can get a loan — and how much you will have to pay to borrow money.

• to make sure the information is accurate, complete, and up-to-date before you apply for a loan for a major purchase like a house or car, buy insurance, or apply for a job.

• to help guard against identity theft. That’s when someone uses your personal information — like your name, your Social Security number, or your credit card number — to commit fraud. Identity thieves may use your information to open a new credit card account in your name. Then, when they don’t pay the bills, the delinquent account is reported on your credit report. Inaccurate information like that could affect your ability to get credit, insurance, or even a job.

Nationwide consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home. There are three nationwide consumer reporting companies — Equifax, Experian, and Trans Union.

You can order your free annual credit report online at, by calling 877-322-8228, or by completing the Annual Credit Report Request Form and mailing it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. When you order, you need to provide your name, address, Social Security number, and date of birth. To verify your identity, you may need to provide some information that only you would know, like the amount of your monthly mortgage payment.

The only authorized source for your free annual credit report from the three nationwide consumer reporting companies is This website, along with the nationwide consumer reporting companies will not send you an email asking for your personal information. If you get an email or see a pop-up ad claiming it’s from or any of the three nationwide consumer reporting companies, do not reply or click on any link in the message — it’s probably a scam.

You may order one, two, or all three reports at the same time, or you may stagger your requests. It’s your choice. Some financial advisors say staggering your requests during a 12-month period may be a good way to keep an eye on the accuracy and completeness of the information in your reports.

Strategic Investment Alternatives for Agricultural Producers: Pathways to Wealth Accumulation

Click Below For pdf Version:

Alternative Investments for Farmers 0503241

Farmers often are invested heavily in fixed assets (overhead) such as farmland and a harmonized set of equipment and buildings dedicated to the production of commodities such as corn, wheat, or milk. These commodities are the outputs from the inputs that are owned or controlled by the farm operator for the purpose of producing income.

Over a lifetime every household participates in wealth accumulation. Wealth accumulation consists of a set of activities over time aimed at producing household income or wealth. While most farmers engage in commodity production to generate current household income, the household often accumulates substantial wealth through farmland appreciation over a lifetime. There are several alternative strategies available for wealth accumulation through additional investment, either on-farm or off-farm. This article discusses these strategic alternatives and provides some evaluation of their characteristics.