Bill Sent to Governor Will Enhance Iowa's Beginning Farmer Tax Credit Program
Last week, the Iowa House and Senate passed HF 768, a bill to enhance Iowa’s Beginning Farmer Tax Credit Program. Once signed by the Governor, the new law will strengthen a program that faced significant cuts in 2018. Under the bill, the Iowa Finance Authority may issue up to $12 million in tax credit certificates each tax year, an increase from $6 million under 2018 law. Notably, the $7.9 million in agreements that existed as of the end of calendar year 2018 are not included as part of the new $12 million cap. The bill changes the formal name of the program to the “Beginning Farmer Tax Credit Program” from the credit named the “agricultural assets transfer tax credit.” The program will continue to provide tax credits to eligible Iowa taxpayers who lease agricultural land (and associated improvements or equipment) to qualified beginning farmers.
Although the Iowa Finance Authority (IFA) will retain oversight authority for the program, the bill requires the agricultural development board to designate one of its members to serve on the IFA’s board of directors. The agricultural development board is also tasked with reviewing and recommending approval of applications for the tax credit.
The bill provides that only “eligible taxpayers” may receive a credit under the program. Eligible taxpayers must meet all of the following requirements:
- Be individuals, partnerships, farm corporations, or family farm limited liability companies
- Lease agricultural land to a qualified beginning farmer (The lease may also include any improvements, as well as the rental of agricultural equipment.)
- Not have improperly terminated a prior agreement under which he or she was able to claim a tax credit
- If the agreement includes the lease of a confinement feeding operation, not be a party to a pending administrative or judicial action, including a contested case, relating to an alleged violation involving an animal feeding operation, whether the action is brought by the Department of Natural Resources or the Attorney General
- Not be classified as a habitual violator of state law respecting an animal feeding operation
- Not be a partner of partnership, shareholder of a family farm corporation or member of a family farm LLC that is the lessee of the land under the agreement
Once eligible, taxpayers may not participate in the program for more than 10 years.
Qualified Beginning Farmer
A qualified beginning farmer must first be a “beginning farmer” under Iowa Code § 16.58. This means that he or she must have a “low or moderate net worth,” which, for 2019, has been set by the IFA at $680,590. A “qualified beginning farmer” with whom the lease agreement is executed must also meet all of the following conditions:
- Be an individual, a partnership, a family farm corporation, or a family farm limited liability company
- Be a resident of Iowa (i.e. all partners of a partnership must be residents of Iowa)
- Have sufficient education, training, or experience in farming (i.e. at least one partner in a partnership (who is not a minor) must meet this requirement)
- Have access to adequate working capital and production items
- Materially and substantially participate in farming (i.e. at least one non-minor partner must meet this test)
- Not own more than a 10 percent ownership interest in an agricultural asset included in the agreement
Agricultural Lease Agreement
To qualify for the program an agricultural lease must meet the following conditions:
- The agricultural lease agreement must describe the consideration paid for the agreement in a manner that allows IFA to calculate the value of the lease and determine the proper amount of the credit
- Must be in writing
- Must be for at least two years, but not more than five years. The agreement may be renewed by the eligible taxpayer and qualified beginning farmer for a term of at least two years, but not more than five years.
- The agreement may not include a lease or rental of equipment intended as a security
- The lease cannot be assigned, and the agricultural land cannot be subleased
- The agricultural assets cannot be rented at a rate substantially higher than the market rate (for cash rent, not more than 30 percent above average cash rent price in the same county under the ISU cash rent survey)
Changes to the Agreement
Once admitted to the program, the lease may be amended (without requiring a new application) only if:
- The terms are more favorable to the farmer (i.e. lower cash rent)
- A party changes his or her name
- The owner is changed to the owner’s estate or trust upon the taxpayer’s death (tax credits cannot otherwise be transferred)
If a change is made to the agreement that impacts the total amount paid to the eligible taxpayer, the taxpayer must contact the IFA within 30 days. The IFA will recalculate the tax credit based upon any decrease. If the amendment increases the total price paid, the tax credit award will not be increased unless an amended application is submitted and approved. This approval will not be granted unless the terms of the change are more favorable to the beginning farmer. A beginning farmer or eligible taxpayer is authorized to terminate the agreement. The taxpayer must notify IFA of that termination within 30 days. If the taxpayer is at fault for the termination, tax credits will be disallowed for the year of the termination. A taxpayer who does not notify the IFA of a termination will be deemed “at fault.”
Applications and Approval Process
The deadline for submitting applications is August 1 of each year. The application shall be for a period not longer than the term of the lease. The IFA is authorized to collect fees and adopt rules necessary to administer the program.
The agricultural development board is required to review and recommend approval of applications for the tax credit. As part of this process, IFA will calculate the amount of the tax credit that may be issued to that applicant. IFA must approve all applications on a first-come, first-served basis and issue tax credit certificates to approved taxpayers. Applicants who are renewing existing leases, however, receive priority.
Calculating the Credit
The IFA will calculate the tax credit based on the type of rent payment arrangement agreed to by the parties. For an agreement which requires a fixed cash rent, the tax credit amount equals 5 percent of the gross amount paid to the taxpayer under the agreement. For an agreement requiring rent payable on a commodity share basis, the tax credit amount equals 15 percent of the amount the taxpayer would receive as a rent payment from the sale of his or her share of the crop in each harvest year. This amount is based upon an equation using data compiled by USDA. For a flexible-rent arrangement under which the taxpayer receives a fixed payment, but also shares some risk, the tax credit amount equals 5 percent of the fixed amount and 15 percent of the amount paid as a percentage of the gross value of the commodity. A tax credit cannot exceed $50,000 in any tax year. An unused tax credit may be carried forward for up to ten years.
Credits and Applications under Prior Program
The bill provides that any approved application for the agricultural asset transfer tax credit is deemed an approved application under the beginning farmer tax credit program. The bill allows a taxpayer who claimed a tax credit under the agricultural assets transfer tax credit and its associated (now repealed) custom farming contract tax credit to continue to carry over the respective tax credits for the remaining 10 years or the depletion of the tax credit.
The bill takes effect upon enactment and applies retroactively to January 1, 2019, to tax years beginning on or after that date.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.