Investors in real estate beware: government payments for enrolling land in the Conservation Reserve Program (CRP) may be subject to the federal FICA tax of 15.3%. This was the recent ruling of the U.S. Tax Court.
The Tax Court decision involved an investor, living in Minnesota, who inherited land located in South Dakota. That investor bid tracts of the land into the federal CRP program. In exchange for a yearly rental payment, landowners enrolled in the CRP program agree to remove environmentally sensitive land from agricultural production and to plant species that will improve environmental health and quality. Contracts for land enrolled in CRP are 10-15 years in length. In the case before the Tax Court, the investor hired a retired farmer to carry out the contract obligations required under the CRP program.
The IRS has a history of ruling, within administrative pronouncements, that payments under the CRP program are subject to the 15.3% self-employment tax. The U.S. Tax Court confirmed that guidance when applied to these facts. In so doing, the Tax Court made the following rulings: a) that the arrangement of the investor was a “trade or business”; and b) that the CRP payments did not constitute “rentals from real estate.”
This decision will undoubtedly impact the willingness of investors to enroll their land within the federal CRP program. Doing so could lead to significantly less favorable tax results. If you or your client is an investor in farmland which is enrolled in the CRP program, and you would like to discuss the potential for self-employment tax on those payments, do not hesitate to contact a member of the McGrath North tax group.