Under the CRP, an owner of farmland enters into a long-term agreement with the U.S. Department of Agriculture. The agreement stipulates that in return for an annualized rental payment, the land owner agrees to convert the land to a less intensive use. The payment may be made in cash, commodity certificates or a combination of both.

All CRP payments are reported to the taxpayer, at year-end, by the U.S. Department of Agriculture of Form 1099-G.

The self-employment tax status of CRP payments has been an area of recent controversy. The IRS position, for many years, has been that government set-aside and idle acres incentives were a substitute for active farm income, and accordingly are reportable as self-employment income by a proprietor on the Schedule F. The IRS did acknowledge that a retired farmer who placed farmland in the CRP was not required to report the income as earnings from self-employment income. For a number of years, the line of demarcation has been that an active producer must report government agriculture program payments as self-employment income. A retired land owner who receives such payments, while the land is in rental status, may report the payments on a rental schedule as not subject to self-employment tax.

However, in 1998, a full Tax Court opinion concluded that CRP payments were the equivalent of rental income, and accordingly were exempt from self-employment tax to any individual, regardless of the individual’s involvement in an active farming operation. The court relied on the fact that the CRP program, both in its statutory construction and in practice, was simply a real estate arrangement, and that under IRC Sec. 1402(a)(1), income from the rental of real estate was exempt from self-employment tax by law.

As a result of this Tax Court decision, we are advising farmers who have reported CRP income on Schedule F (subject to SE tax) to consider filing amended returns for open years, and to report CRP income as exempt from SE tax in future years. For future years, in order to allow the IRS Service Center computers to match the U.S. Department of Agriculture Form 1099-G, practitioners should use IRS Form 4835 for reporting CRP income. Form 4835 is used for rental agreements and is not subject to SE tax.