TaxByte 2016-6

Remember, Social Security Recipients Pay No SE Tax on CRP Income

We've discovered there is some confusion out there regarding who pays self-employment tax on CRP income. Remember, the  Food, Conservation, and Energy  Act  of  2008  excludes all CRP  payments  from  self-employment  tax  for  individuals  receiving  social  security  benefits for retirement or disability. This is effective for payments received after December 31, 2007.

If your client is receiving social security retirement  or  social  security  disability benefits at the time they received the Conservation  Reserve  Program  (CRP) payment(s),  enter  the  amount  of  the taxable  CRP  payment(s) on Form 1040 Schedule F line  4a. Generally this is where IRS will look for the amount to match with information reporting documents reported on Form 1099-G, and the taxable amount is shown on line 4b.  The CRP may also be reported on Schedule K-1 (Form 1065), box 20, code Z.  Form 4835 Farm Rental Income and Expenses also provides line 3a for this purpose.  At this time we do not know what matching process IRS employs in matching the CRP amounts from Form 1099-G with Form 4835.

What we do know is that IRS has not acquiesced on the Moorehouse case and has stated they will continue to audit the issue.This case applies to non farmers who receive CRP income. However, If the farmer or nonfarmer is retired and receiving social security benefits or disability from social security the CRP is not subject to self-employment tax.  Use Form 1040 Schedule SE, Self-Employment Tax to remove CRP from the tax using line 1b.

Example: A farmer age 68 and on social security has retired with the exception of cash renting his neighbor's 95 acres and having it custom farmed. His owns a farm of approximately 950 acres he has cash rented out and has enrolled the remainder of his farm  in the conservation reserve program.  How should this be reported?

With thoughts concerning the IRS matching program, I would report the CRP on Form 1040 Schedule F, then prepare the Form 1040 SE to remove the CRP from income subject to self-employment. By doing this the retired farmer will only pay income tax on the CRP payments.   As to the other farm income of the 95 acres which is custom farmed and the farm land that is cash rented to another individual, Form 4835 can be used if the client was the landowner (or sub-lessor) and did not materially participate (for self-employment tax purposes) in the operation or management of the farm.