The Internal Revenue Service has proposed a rule that would make farmers pay self-employment taxes on Conservation Reserve Program payments. Iowa State University Ag Law Professor Roger McEowen says the I-R-S first proposed the rule in 2003.

All U.S.D.A. land-diversion and conservation-type program payments are subject to the self-employment tax, he explains, and that view’s been around for a little over three years. He says this is just a confirmation of that position, after years of discussion about whether the tax applied to farmers who worked the land themselves, or those who just owned it and hired laborers to farm it.

They’re saying the mere signing of a C-R-P contract and participating in the CPR constitutes a “trade or business” and your money’s subject to that self-employment tax. McEowen says if the fifteen-point-3-percent tax on C-R-P payments is approved, it would not only discourage people from participating in the program, but could subject them to back taxes.

It could provide a disincentive, but he points out the Internal Revenue Service has held this position on the tax for over three years. Anyone who hasn’t been paying self-employment tax on their C-R-P payments has been technically in violation of the law all this time. McEowen says the proposed rule runs contrary to prior I-R-S rulings and case law. The Internal Revenue Service has always taken the position that someone must be “materially participating” in a farming operation before the C-R-P rents are subject to “S-E” — self-employment tax.

That may offer a loophole for some. “If I’m retired,” he explains, “then I bid my land into the C-R-P and get C-R-P rents for it — historically those have not been subject to self-employment tax because there’s no active trade or business of farming.” Also for an investor in farmland who has no farming operation associated with the property, the view’s historic been that they aren’t subject to the tax, either. Public comments on the new rule are due by March 19th.

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C-R-P self-employment tax issue