Conservation, Food and Energy Act of 2008 (Farm Act)
It was a long time in the making but we finally have a new federal farm act, the Conservation, Food and Energy Act of 2008. Negotiations between the House and Senate were long and drawn-out. At times, it looked like the farm act might not make it out of Congress let alone survive a threatened presidential veto. Congress passed and President Bush made good on his veto threat; however, lawmakers voted to override the president's veto just before Memorial Day.
The $300 billion farm act includes $1.7 billion in tax incentives for farmers and ranchers. However, what Congress gives it can also take away. Most notably, the farm act conditionally reduces the ethanol production tax credit.
Let's take a look at some of the major tax incentives in the farm act:
CRP payments. In 2006, the IRS issued a controversial ruling on the self-employment tax treatment of payments made by the USDA under land diversion programs (Conservation Reserve Payments (CRP)). The IRS determined that CRP payments made to retired or disabled farmers would be included in net income from self-employment. Despite pressure from lawmakers and farmers, the IRS signaled it would not change its position unless Congress forced it to. The farm act does just that. CRP payments made to retired or disabled farmers are excluded from net income from self-employment under the rentals from real estate exclusion.
Social Security coverage. The farm act also helps farmers (and nonfarmers) secure more Social Security coverage by increasing and indexing the dollar thresholds for purposes of the farm optional and nonfarm optional methods of computing net earnings from self-employment. Using the farm optional method, an individual can report more net profit than he or she actually had, allowing the individual to pay the self-employment tax on this amount and secure Social Security and Medicare protection. This treatment is effective for tax years beginning after December 31, 2007.
Charitable contributions. Several years ago, Congress enhanced the deduction for charitable contributions of real property for conservation purposes. Individual donors of real property for conservation purposes were eligible to take a deduction of up to 50 percent of their contribution base, rather than the usual 20 percent limitation. Farmers and ranchers benefited from a special enhancement. They were allowed a deduction limit of 100 percent of their contribution base. However, this special treatment was temporary and expired at the end of 2007. The farm act extends it for two more years.
Agricultural bonds. The farm act updates the agricultural bond program for the first time in more than 20 years. The new law increases the loan limit for an individual first-time farmer from $250,000 to $450,000 and indexes the limitation amount for inflation. The farm act also removes the fair market value test from the definition of substantial farmland.
More provisions. The farm act also creates new tax credits for producing cellulosic biofuels and protecting agricultural chemicals; allows for the tax-free exchange of stock that represents a holding of water rights; and authorizes new forestry conservation bonds.
Revenue raisers. Of course, Congress had to find a way to pay for all of these tax incentives and it chose to reduce the ethanol production tax credit and limit farm losses. The ethanol production tax credit will drop six cents to $0.45 per gallon beginning in 2009. However, Congress included a trigger delay if fewer than 7.5 billion gallons of ethanol are produced or imported into the U.S. in 2008. The new law also extends the current tariff on imported ethanol through 2010. Additionally, the farm act limits the amount of farming losses that can be utilized against non-farming business income by a taxpayer receiving certain subsidies. Allowable Schedule F losses will be limited to the greater of $300,000 ($150,000 for married couples filing separately) or the taxpayer's net farm income for the past five years. The provision is effective for tax years beginning after 2009 and is aimed at taxpayers not operating as C corporations. Finally, Congress also codified some information reporting requirements imposed on Commodity Credit Corporation (CCC) loans.
If you have any questions about the tax incentives in the farm act, please do not hesitate to contact us. Give our office a call or send us an e-mail. We will be glad to discuss the farm act in much more detail and see if you take advantage of some of its tax incentives.
