Reporting CRP Income: Nothing New, but a Common Source of Questions
With the initial filing deadlines behind us for filing our federal income tax returns, I turn today to a common question we receive at the Center. Has anything changed with respect to reporting CRP income? Briefly, the answer is "no," but a summary of the current status of this issue may be useful.
Although it does provide some cost-share payments to farmers to implement conservation improvements to land, the CRP is primarily a program under which landowners receive yearly payments in exchange for agreeing to remove agricultural land from production. The landowner also agrees to manage the land to improve water quality, prevent soil erosion, and reduce loss of wildlife habitat. These contracts are from 10 to 15 years in length.
Income Reporting
CRP payments are reported to recipients on IRS Form 1099-G. Most recipients of CRP payments report them as income from a government payment on lines 4a and 4b of IRS Form 1040, Schedule F. These payments are generally subject to self-employment (SE) tax.
Social Security Recipients
The Food, Conservation, and Energy Act of 2008 (the 2008 Farm Bill), Pub. L. No. 110-234, § 15301, amended I.R.C. § 1402(a)(1) to exclude CRP payments from the definition of net earnings from self-employment if the CRP payments are made to individuals receiving benefits under section 202 (old-age and survivors) or section 223 (disability) of the Social Security Act. Thus, individuals receiving the specified social security or disability payments do not include CRP payments in net earnings from self-employment, and the taxpayer’s material participation in the required CRP activities or in the farming operation does not make the CRP payment subject to SE tax.
To avoid an IRS matching error, social security or disability recipients should report CRP payments on Schedule F (Form 1040), lines 4a and 4b. They should then deduct the amount of the CRP payment on Schedule SE (Form 1040), line b, noting that the payment is excluded from net earnings from self-employment tax under I.R.C. § 1402(a)(1).
Nonfarmers
In 2014, the United States Court of Appeals for the Eighth Circuit ruled that CRP payments made to a nonfarmer (someone not materially participating in a farming activity) were real estate rental payments not subject to SE tax [Morehouse v. Commissioner, 769 F.3d 616 (8th Cir. 2014)].
In 2015, the IRS stated that it would follow the Morehouse ruling only within the Eighth Circuit, and only in cases where the CRP payments were: (1) made to a person not engaged in farming; and (2) paid prior to January 1, 2008, which is the effective date of the 2008 amendment to section 1402(a)(1). [A.O.D. 2015-02, 2015-41 I.R.B. 493 (October 13, 2015)]. The A.O.D. states that the IRS will continue to litigate its position in Eighth Circuit cases that do not have these specific facts and in all cases in the other circuits.
Specifically, the IRS argued in its AOD that CRP payments made by the USDA do not (as Morehouse held) constitute rentals from real estate, which would be excluded from SE tax. Instead, the IRS urged that the payments constitute net earnings from self-employment, which means gross income derived by an individual from any trade or business. [I.R.C. § 1402(a)]. The IRS emphasized that the Eighth Circuit did not base its opinion on a conclusion that the CRP payments received by Morehouse were not subject to SE tax because Morehouse’s CRP activities did not constitute the carrying on of a trade or business.
Morehouse likely provides nonfarmers in the 8th Circuit with substantial authority to exclude the income from SE tax liability. Those who choose this option, however, risk an assessment from the IRS in keeping with its AOD. Those nonfarmers who choose to report CRP income on Schedule F as directed by the IRS may claim the I.R.C. § 199A deduction for the income. The IRS argued in the AOD that the CRP income derives from a trade or business.
Example – Nonfarmer Reporting CRP Payments
Jane Smith, 45 years old, owns a piece of agricultural land, but does not engage in farming activities. In 2024, she received CRP payments for enrolling her land in the Conservation Reserve Program, which she must report on her tax return. Jane lives in Missouri, which is in the Eighth Circuit, where the Morehouse ruling applies. Jane must decide if she will follow the Morehouse ruling (excluding the income from self-employment tax) or the IRS position (reporting on Schedule F as farming income subject to SE tax).
If she reports the income only on Schedule E, she will likely receive an automated notice informing her that the CRP income reported to her on the 1099-G has not been properly reported. To avoid this matching error, Jane can report this income also on lines 4a and 4b of Schedule F and then deduct the same amount on line 32a of Schedule F. IRS may challenge this position.