How will CRP land be taxed?

“…if this court ruling is allowed to stand, it could drive some farmers into bankruptcy.”

A bi-partisan effort is underway in both the U.S. Senate and the U.S. House of Representatives to clarify congressional intent of the Conservation Reserve Program (CRP) authorized in the Food Security Act of 1985 and re-authorized in 1996.

Called the CRP Tax Fairness Act, the proposed legislation responds to a March 3 ruling by the Sixth Circuit Court of Appeals making CRP payments subject to self-employment taxes. Until the Court of Appeals reversal, CRP land was taxed as rental income.

“CRP land is rented land, and taxed as such,” said Dexter, Mo., farmer Charles Kruse, Missouri Farm Bureau President. “The very idea farmers should be taxed farm income instead of rental income for untilled rented land is preposterous.”

The purpose of the Conservation Reserve Program is to prevent soil erosion and protect water quality by keeping the most erodible farmland out of production. The CRP provides rent to farmers whose land is accepted into the program, and the land is removed from agricultural production.

“By categorizing CRP acres as farm income instead of rental income, the Court of Appeals places farmers in the position of being responsible for paying self-employment Social Security taxes on such acreage,” Kruse said. “To make matters worse, the Internal Revenue Service (IRS) is expected to push for collection of such taxes on returns filed as far back as 1996.

“Farmers are going through some of the toughest economic times in their history right now, and if this court ruling is allowed to stand, it could drive some farmers into bankruptcy,” Kruse said. “Even if these were the best of times for farmers, however, the Missouri Farm Bureau would fight this ruling with everything we have. Rental income should be taxed as rental income – nothing more and nothing less.”

Both of Missouri’s U.S. Senators, Kit Bond and John Ashcroft, are original cosponsors of the Senate version, and the state’s House of Representative delegation is expected to support the House version of the legislation.

“The attempt by the IRS to tax CRP land as earned income rather than rental income is just another example of government bureaucracy overstepping their bounds,” Kruse said. “Regulatory agencies have no right to alter congressional intent when making rules to enforce new laws, but they do. Their actions not only affect farmers, but every citizen trying to run a business today.”

While the Sixth Circuit Court of Appeals only has jurisdiction over Ohio, Tennessee, Michigan and Kentucky, if allowed to stand, Kruse said the ruling could result in audits of farmers in other states by the IRS with the intent of securing favorable court rulings to alter the tax nationwide.