Iowa Beginning Farmer Tax Credits Facing Changes
Update: The 2017 legislative session ended without passage of any legislation relating to the Beginning Farmer Tax Credit. As such, the changes detailed in this posting will occur January 1, 2018.
As the 2017 Iowa legislative session winds down, a program key to Iowa’s beginning farmers could see some significant changes. Unless the Iowa Legislature acts to extend various provisions of the Iowa Beginning Farmer Tax Credit (BFTC) program, it will look very different in 2018.
The Iowa Legislature created the BFTC program in 2007 to encourage owners of agricultural assets to lease those assets to beginning farmers. Called the “agricultural assets transfer tax credit,” (AATC) this initial credit allowed a retiring farmer, for example, to receive an Iowa tax credit in exchange for leasing farmland to a qualified beginning farmer. In 2013, the Legislature expanded the program to also grant tax credits to those who hire a qualified beginning farmer for custom farm work.
Under the BFTC program, qualified “beginning farmers” must possess the following requirements:
- Iowa residency
- Sufficient education, training, or experience in farming
- Access to adequate working capital and production items
- Material and substantial participation in farming
- Net worth not greater than $645,284 as of January 1, 2017 (for 2017 credit)
In 2009, the Iowa Legislature placed a cap of $6 million on the value of credits that could be awarded in Iowa. When it created the custom farming contract tax credit (CFTC) in 2013, the Legislature increased this cap to $12 million, $8 million of which was allotted to the AATC and $4 million of which was allotted to the CFTC. The 2013 provisions are set to expire on January 1, 2018. The Iowa Finance Authority is charged with administering the BFTC program, which includes both the AATC and the CFTC. The final deadline for 2017 AATC applications is September 1, 2017, and the final deadline for 2017 CFTC applications is November 1, 2017. Application fees begins at $200. Successful 2017 applicants receive tax credit certificates for use when filing their 2017 Iowa income tax returns.
“Agricultural Assets Transfer Tax Credit”
The AATC grants an owner of agricultural assets a tax credit for leasing agricultural land, depreciable machinery or equipment, breeding livestock, or buildings to a qualified beginning farmer. In 2017, the credit is 7% of the value of a cash rent lease or 17% of the value of a crop share lease. Landowners do not receive a credit for any bonus amount earned under a flex lease. The credit is calculated based upon the base rent only. For crop share leases, 50% of acres are allocated to corn and 50% to soybeans, unless other crop acres are specifically identified in the lease. Crop share calculations are based upon the county's historical average T-yield data, and the price is the previous year's RMA fall price. Owners who lease assets to a beginning farmer who is veteran receive an additional 1% credit during the first year of the lease, for a total of 8% for a cash rent lease and 18% for a crop share lease.
Example: John leases 300 acres of crop ground from Jim for $200/acre in 2017. Assuming John is a qualified beginning farmer who is a veteran, Jim should qualify for a $4,800 Iowa tax credit if the BFTC program application is approved (=$60,000 cash rent income * .08 credit).
To qualify for the AATC, the parties’ lease must be in writing and 2-5 years in length. No taxpayer can receive more than $50,000 in beginning farmer tax credits per year. Parents can qualify for the credit by leasing their agricultural assets to their children who are qualified beginning farmers. If the amount of the tax credit is greater than the taxpayer’s Iowa tax liability, the credit may be carried forward for up to 10 years. It is not refundable.
If the Legislature does not extend the current beginning farmer tax credit provisions, the 2018 AATC will return to 5% of the value of a cash rent lease and 15% of the value of a crop share lease. There will be no enhanced credit for leases to a veteran. Furthermore, the cap for available AATCs will reset to $6 million per year.
“Custom Farming Contract Tax Credit”
In 2017, taxpayers who hire a qualified beginning farmer to complete agricultural contract work for the production of crops or livestock in Iowa may qualify for a tax credit equal to 7% of the custom contract amount. This amount increases to 8% if the beginning farmer is a veteran. To qualify for the credit, custom farming contracts must be in writing, and they are limited to a period of 24 months or less. The beginning farmer must provide all labor and required machinery. Unlike the AATC, parents cannot receive a tax credit for entering into a custom farming contract with their children.
The CFTC is set to expire entirely on January 1, 2018, unless the Legislature acts to extend it. Although the AATC would continue with a $6 million cap and lower credit percentages, there will not be a 2018 credit for beginning farmer custom farming contracts if the Legislature does not act to revive it.
Impact of the Credit
A tax credit is more beneficial than a tax deduction because it is a dollar-for-dollar reduction in tax, as opposed to a mere reduction in taxable income. Taxpayers must have Iowa income tax liability, however, to benefit from the credit.
It should also be noted that non-resident Iowa landowners may not receive a practical benefit from the Iowa credit. When a nonresident earns Iowa income, he or she must pay Iowa income tax. This tax is reduced by any BFTC credit. When that nonresident, however, pays taxes in their home state, that state typically requires the taxpayer to report all income, including that received in Iowa. Many states then give the taxpayer a credit for any taxes paid in Iowa, as opposed to income earned in Iowa. Because an Iowa credit reduces the taxes paid, but not the income earned, the taxpayer may end up paying less tax in Iowa, but more tax in his or her home state because of the credit. Taxpayers considering an application for the BFTC should consult with their tax advisors to consider its impact on their individual financial situations.
Update: Neither of these bills passed the Iowa Legislature.
HF 495, which would extend the current BFTC program, made it through the second legislative funnel at the end of March and remains alive. It is unclear, however, how this legislation will fare in the midst of significant, across-the-board state budget cuts.
HF 652 passed out of subcommittee on April 18. It would retroactively reduce the 2017 AATC credit from 7% to 6% for a cash rent lease and from 17% to 16% for a share lease. The proposed legislation would also retroactively reduce the CFTC from 7% to 6% for 2017. For 2018, the proposed legislation would slash the AATC from 5% to 4.5% for cash leases and from 15% to 14% for share leases. CFTC would expire.
We will keep you posted on the status of this important credit in the face of widespread state budget cuts.
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.