Does a landowner owe self-employment tax on Conservation Reserve Payment (CRP) income? It depends. Welcome to a debate that first started in 1988 and has yet to be resolved.
Although it hasn't finalized regulations or been directed by Congress, IRS seems to be expanding its definition of landowners who owe the tax, DTN's tax columnist Andy Biebl tells me. Biebl is a CPA and principal with the accounting firm of LarsonAllen in Minneapolis and New Ulm, Minn., former president of the Minnesota CPAs and one of the nation's leading tax authorities on agriculture.
While CRP payments are called rent, IRS considers them more like farm income than passive rental arrangements, says Biebl. And that distinction has some taxpayers ducking for cover. Farm widows and investors who never farmed have been snagged in audits.
At least two CRP contract holders are appealing IRS audits this week. One is a mid-50s investor who bought CRP ground in South Dakota and has never farmed in his life. Another is an Illinois farmer who bought land 250 miles away in a neighboring state, and never planned to farm it. Both paid income tax on their CRP rental payments, but not self-employment tax. That would be logical, if CRP rents were treated as cash rents as they were under a 1998 Tax Court ruling, but that case was reversed on appeal in 2000.
IRS's Farmer's Tax Guide doesn't offer much guidance now. It says only that "CRP payments are excluded from self-employment tax for individuals receiving Social Security benefits for retirement or disability." So that means retirees are safe, but IRS remains silent on whether CRP owners who don't collect social security and who take no active management in a farm business should pay the tax.
In general, cash rent landlords pay no Social Security tax on their earnings because they do not materially participate in a lease and take no risk in production or marketing. Logic would lead you to believe CRP landlords would be treated the same. Afterall, is rent from grassland and wildlife habitat in the CRP any different than collecting cash rent on row crops?
Some farm managers take the safe route. Randy Hertz, with Hertz Farm Management in Nevada, Iowa, says. "This is a frustrating issue for investors. My recommendation has always been to treat CRP income as schedule F income, even where the good cropland is cash rented. This may not be what people like to hear, but the IRS has always considered CRP to be active income."
Biebl thinks it's worth fighting the IRS. "We always recommend that active farmers report self-employment taxes on their CRP rents," Biebl says, but he considers investors in a different status. He thinks "this is a case of IRS not playing fair" and acting without authority. The agency issued a proposed rule on this subject several years ago, but never finalized it, Biebl notes. "It's improper to pretend that's law now."
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