End-of-Year Considerations for an Unprecedented Year
It has certainly been a year of challenges. COVID-19 triggered widespread economic harm, a once-in-a-lifetime derecho flattened fields and pummeled grain bins, and drought compounded the damage. Because of these disasters, most farmers received some unexpected payments in 2020. These payments kept many farmers afloat through a very tough year, but proper management of this income is important to maximize its benefit. This article summarizes key payments received by cash basis farmers in 2020 and their tax consequences. This unusual year makes end-of-the year planning with a trusted advisor more important than ever.
ARC-CO / PLC Payments
The 2018 Farm Bill retained (with some adjustments) the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs created by the 2014 Farm Bill. Farmers began receiving these payments in October of 2020 for their 2019 crops. All Iowa farms enrolled in PLC should receive a payment for corn-based acres, while some farms enrolled in ARC-CO for soybeans will receive a low payment. In Iowa, almost no ARC-CO payments will be made for corn acres, and no PLC payments will be made for soybean acres. Iowa State economists have estimated that the PLC payment for 2019 corn in Iowa will average $16.17 per acre.
Farmers must include these payments in gross income (subject to self-employment tax) for the year in which they are received. They are reported on lines 4a and 4b of IRS Form 1040, Schedule F. See Schedule F Instructions, page 4.
Market Facilitation Program Payments
Many farmers received a third round of 2019 market facilitation program (MFP) payments in February of 2020. These were the final payments provided by the program intended to compensate farmers for damage stemming from trade disruptions. The 2019 MFP payments to Iowa farmers totaled $1.6 billion, with the 2020 payment comprising 25 percent of the total.
Farmers must include these payments in gross income (subject to self-employment tax) for the year in which they are received. See IRS Chief Counsel Memorandum 2018-21. They are reported on lines 4a and 4b of IRS Form 1040, Schedule F. See Schedule F Instructions, page 4.
CFAP 1 and CFAP 2
The Coronavirus Food Assistance Program was created by the USDA to compensate farmers for losses associated with COVID-19. CFAP 1, unveiled in May of 2020, compensated producers through a combination of $9.5 million in CARES Act funding and $6.5 million in Commodity Credit Corporation funding. The first round of payments issued in June with the second round paid in August. As of mid-October, approximately $10 billion had been paid to farmers through CFAP 1, with nearly 10 percent of those payments made to Iowa farmers.
CFAP 2 was announced September 18, with applications allowed through December 11, 2020. CFAP 2 may issue up to $14 billion in additional payments to farmers. USDA had issued $6 billion in CFAP 2 payments by the third week of October, with Iowa farmers receiving $604 million of those payments.
Farmers must include CFAP payments in gross income (subject to self-employment tax) for the year in which they are received. They are reported on lines 4a and 4b of IRS Form 1040, Schedule F. See 2020 Publication 225, page 2.
Syngenta Settlement Payments
Beginning in March of 2020, eligible producers and crop share landlords began receiving interim payments from the $1.5 billion Syngenta settlement. The interim payments totaled approximately 65 percent of the overall payment. The administrator expects to issue final payments during late fall or early winter of 2020. See www.cornseedsettlement.com for more information.
Because the Syngenta payments are intended to compensate recipients for lost profits from farming, farmers should report the payments as ordinary income, subject to self-employment, for the year in which they are received. Crop share landlords would report the payments as they report other crop share income.
Many Iowa farmers will receive crop insurance payments in 2020, stemming from crop damage incurred because of the devastating derecho or drought.
Generally, cash basis farmers must include proceeds from crop insurance and federal disaster programs in gross income for the tax year during which they receive the payments. The tax code, however, provides a special deferral provision for insurance proceeds and disaster payments received as a result of “destruction or damage to crops.” Farmers who meet the requirements of the statute may elect to include the proceeds in gross income for the tax year following the destruction or damage. This one-year deferral protects farmers from recognizing excessive income in one year when their regular practice would have been to sell the crop in the following tax year.
Crop and Livestock Sales
In 2020, farmers will have income from crop and livestock sales, some of which may have been unplanned. For example, grain bins destroyed by the derecho may cause farmers to sell grain earlier than expected. Additionally, the relief payments detailed above, all of which must be recognized in 2020, may cause some farmers’ 2020 income to be higher than expected, while 2021 may be lower.
Farmers concerned about this income bunching, can defer income from the sale of crops or livestock in the year of the sale by deferring receipt of payment until the following year through a deferred payment contract. Under such contracts, a farmer can sell a commodity in 2020, but will not receive payment (or trigger income tax liability) until 2021. One of the best features of these contracts is their flexibility. If when filing tax returns for the 2020 year it would benefit the farmer to recognize income from the deferred price contract in 2020, the farmer can elect to report constructive receipt of the income in 2020, the year of the sale. This election is made by simply reporting the income from the sale on the 2020 Schedule F. See Publication 225, page 20, Farmer’s ATG, Chapter 9, page 30.
Other COVID Relief Payments
Many farmers, like most Americans, received economic impact payments, also called “stimulus payments,” in 2020. These were $1,200 payments ($2,400 for a couple) and $500 for children under 17 years of age. These payments are not included in gross income and will not generate tax liability. See IRS Q & A.
Many farmers also received Paycheck Protection Program loans in 2020. When forgiven, the proceeds of the loan are not included in gross income and will not be subject to taxation. Current guidance from the Department of the Treasury, however, provides that expenses paid with the loan (if it is forgiven) are not deductible. See this post for more information. There is broad support for Congress to change this rule, but it is unclear whether that will happen. In the meantime, it may be best for farmers to wait to apply for forgiveness until more is known. Some farmers also received EIDL advances in the amount of $1,000 per employee (up to $10,000). These advances (called grants by SBA) reduce PPP loan forgiveness. Because the CARES Act does not exclude EIDL grants from gross income (as it does a forgiven PPP loan), these grants should be reported in gross income absent guidance to the contrary.
State Grants Funded by CARES Act Money
Many farmers may have received other grants through their state, funded by CARES Act money. In Iowa, for example, such programs included the Livestock Producer Relief Fund and the Beginning Farmer Debt Relief Fund. See this post for more details. These grants are not excluded from gross income by any federal law. As such, they should be reported as farm income on the Schedule F. See IRS Q & A regarding these grant payments. Iowa Small Business Relief Grants have been granted state tax exemption by the Iowa Legislature. In the absence of further guidance, however, there is no indication that this exclusion applies to the agricultural grants.
Farmers have a number of tools available to help manage their tax liability. Some of these options, however, are only available through year-end. Additionally, farmers who receive insurance on the Marketplace must ensure that income stays below 400 percent of the federal poverty limit or they will have to fully repay premiums paid on their behalf in 2020.
Avoiding income spikes and dips prevents overall income from being taxed at unnecessarily high tax rates. Some common techniques farmers may use to avoid this problem include income averaging, prepaying expenses, making contributions to retirement accounts, gifting grain to a charity, carefully timing the purchase or sale of assets, entering into or electing out of deferred payment contracts, and properly managing depreciation and expensing decisions. Farmers should consult with their advisors to discuss their best options.
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.