by Roger A. McEowen
One of the issues that we will be addressing at the CALT summer seminars concerns the tax issues associated with the early termination of a CRP contract. This has occurred with some CRP land in recent years. Some matters are set forth in the CRP contract itself, but many other issues associated with early termination require further thought. Paul Neiffer, CPA with CliftonLarsonAllen will be a part of our teaching teams. Here’s a summary of how he will break it down at the seminars:
By contract, when a CRP contract is terminated before its specified termination date, all payments that the landowner received must be paid back, along with interest and the possibility of liquidated damages. But, what should be done for tax purposes with the amount that has to be paid as a result of early termination of the contract? The answer is, “it depends.” Here are the possibilities:
- If the farmer is going to farm the land that was in the CRP, then the amount paid to terminate the contract should be capitalized and amortized over the amount of time that remained on the CRP contract. It’s not currently deductible.
- If the farmer will sell the land, then the cost associated with early should be added to the basis in the land. If there is a time lag between the time the contract is terminated and the land is sold, then the termination cost should be amortized over the balance of the CRP contract.
- If the farmer will lease the land to another farmer, the payment should be amortized over the remained of the contract term.
- If the farmer sells the land and the buyer pays the termination costs, capitalization is most likely the rule.
- Liquidated damages would also be capitalized. They are not classified as a fine or penalty under I.R.C. §162 or Treas. Reg. §1.162-21(b)(2).