Unless your farm’s small business income, expenses and write-offs are the same every calendar year, your federal income tax return and your operation’s business tax return should look different each tax year. Tax laws and tax rates change every year, and if you received a grant from the federal government, there are few things that will look different on your taxes this year. Let's dive into those so you know how to complete your tax forms properly.
Farmers and ranchers who get Environmental Quality Incentives Program (EQIP) grants may be wondering about the tax implications for this funding. Our Farmer Success team dug into the details and found that EQIP recipients - especially those receiving large grants – may fail to adequately account for EQIP grants on their tax returns and as a result, miss out on thousands of dollars in income tax savings.
At FarmRaise, we want to see producers achieve profitability so we dive into tough tax topics to help you become more financially savvy. However, this article is for informational purposes only and doesn't replace professional tax advice. We're here to provide general guidance of farm and agricultural tax concepts, but it may not apply to all operations and producers. It's always best to consult a professional tax advisor to address your specific tax questions and circumstances.
There are two things to look out for if you’ve received cost-share from the U.S. Department of Agriculture (USDA) for conservation expenses. The first is that you take full advantage of the conservation tax deduction, and the second is that you do not overuse the tax deduction.
Many tax preparers haven’t learned how to handle EQIP or other NRCS cost-share awards and fail to include them as part of the depreciation schedule or Schedule F expenses incurred. This is important because the Internal Revenue Service (IRS) allows farmers to slot up to 25 percent of their gross farming income in a soil and water conservation expense category.
For farmers who received a large EQIP grant that exceeds this 25 percent threshold, they may incur significant tax liabilities if they proceed with filing their return in this same way. Make sure to inform your tax preparer of your intention to deduct your conservation expenses from your farm taxes, and confirm that the amount you are deducting does not exceed the 25 percent threshold.
Yes. Funds received through a conservation contract with the USDA, such as EQIP, are taxable income, which means that they will be included your total income for the year. Any EQIP payments would be considered “government program payments” in your income line items.
If you received an EQIP grant for your farm, ranch or forestland, the Natural Resources Conservation Service (NRCS) will send you a Form 1099-G which you should use to complete your tax return.
Take note! EQIP funds have two components: the funds you receive through the program, which are considered taxable farm income, and the funds you spend on the conservation expenses. Your incoming funds from the USDA will show up as income, and your outgoing expenses can be categorized as “conservation” expenses and deducted from your taxes (up to 25 percent of your total income).
It might not sound so appealing that money granted to you by the government is taxable. The good news? There’s a fix that your tax preparer can employ.
Section I.R.C. 126 of the IRS tax code allows farmers to write large EQIP grants into this section to protect them from being categorized as taxable income and expenses. To ensure that you’re maximizing your tax return, you should check with their tax preparer to make sure they’re up to date on I.R.C. 126 along with the farm’s tax records. This can save you thousands of dollars in taxes, untold time and stress navigating the tax implications of your hard-earned EQIP project.
To adequately track your conservation expenses for tax season, you’ll want to keep records of all conservation-related expenses throughout the year. These records could include receipts, invoices, photos of your practice implementation and contract letters or conservation plans from the USDA.
Instead of keeping all of these records scattered throughout your farm or office, we recommend using a proactive record-keeping tool to streamline and simplify the tracking process.
Fortunately, FarmRaise Tracks is a mobile app we designed specifically for this purpose. You can upload photos of receipts and invoices, assign them to a transaction, and categorize that transaction according to your farm products or tax categories.
For example, let’s say you are awarded an EQIP contract this year that allows you to start planting cover crops this fall. You are going to pay the cost of the cover crop seed and have a custom hire come out to your fields to apply the seed for you. By opening your Tracks app, which works offline in case you lose signal in the field, you can log your receipts and invoices right as they’re happening and categorize your expenses in less than 5 minutes. The app will save all of your data and then allow you to export reports to help your tax preparer with your annual tax prep. And it works offline, too!
You can learn more about budgeting and expense tracking on our blog, or view a demo of the FarmRaise Tracks app here.
This tool helps you keep great financial records for reporting on your EQIP grant. Sign up for FarmRaise Tracks to get started!
To prepare for tax season, here are some helpful resources about farm tax prep:
Your Guide to 2023 Farm Tax Season: Learn about how to maximize your tax return, exemptions, which expenses to keep track of during the year, depreciation for tractors and farm equipment, farm property tax and more.
Learn About Form Schedule F for Taxes: Understanding the Schedule F form is key for producers in charge of filing taxes. Learn about this essential document and what you’ll need to properly file it.
Taxes can seem daunting and complicated. But ultimately, if you stay organized and informed you can actually save yourself money when you properly file your conversation funding. Don’t let tax season intimidate you from applying for conservation funding for your farm, ranch, forestland or wetlands. FarmRaise is here to help and you’re looking for help applying, we have your back!
EQIP helps farmers access funding their operations are more profitable and environmentally-friendly. Explore how to get conservation funding through EQIP:
