Self-emploment taxes on Conservation Reserve Program payments

ISSUE

USDA Conservation Reserve Program (CRP) payments should not be subject to self-employment taxes.

BACKGROUND

Most farmers and ranchers are self-employed and pay self-employment taxes (SE) on earned income at the rate of 15.3 percent for Social Security and Medicare. Because the SE tax is a tax on earned income, it does not ordinarily apply to rental earnings since rent represents a return on an investment and is not earned income.

USDA makes Conservation Reserve Program (CRP) payments to land owners who sign rental agreements and refrain from farming the property in order to conserve and improve the environmental resources of that land. Recent, but conflicting, court decisions have allowed the IRS to collect SE taxes on CRP rental payments when the landowner is actively engaged in farming. The IRS is now proposing to expand the collection of SE taxes to include CRP rent paid to non-farm landlords.

The IRS wrongly argues that it can collect SE taxes on CRP rent paid to farmers and ranchers because there is a relationship (nexus) between the business of farming and CRP rental property. A farmer that rents CRP land to the government is engaged in more than one business, one that is subject to SE taxes and one that is not. SE taxes should only be collected on earned income from the farming business and not on unearned income from the business of renting property.

SE taxes should not be paid on CRP payments because they clearly constitute “rent” that by law should not be subject to SE taxation. Farmers, as part of their CRP contract, agree not to farm the land and obligate themselves to provide minimal maintenance services. These required maintenance activities are not services to the government, but rather activities needed to make the property usable for conservation purposes.

It is wrong for the IRS to single out farmers and ranchers to pay the self-employment tax on CRP rental receipts when property owners in analogous situations do not pay the tax. For example, a building owner rents space to a tenant for a fee and provides basic upkeep to repair normal wear and tear and maintain the property. The building owner does not pay SE taxes on rental income; therefore, CRP rent should be treated the same.

Because of the inequity of collecting SE taxes on some farmland rentals and not on others, government efforts to protect environmentally sensitive land could be reduced. No SE taxes are paid when a farmer rents land to an another farmer. As with a CRP rental, the landowner does not produce a commodity and provides only minimal upkeep to maintain the land for the use of the tenant. Yet, the resulting tax advantage makes rental for commodity production more appealing than renting land for conservation under the CRP.

AFBF POLICY

USDA Conservation Reserve Payments (CRP) payments should not be subject to self-employment taxes.

LEGISLATIVE STATUS

Farm Bureau supports S. 1155, introduced by Sens. Dorgan (D-N.D.) and Brownback (R-Kan.), and H.R. 2659, introduced by Reps. Earl Pomeroy (D-N.D.) and Kenny Hulshof (R-Mo.) to clarify the CRP payments should not be subject to self-employment taxes.

ACTION

Congress should pass legislation to enact USDA Conservation Reserve Program (CRP) payments which would not be subject to self-employment taxes.

September 2007