Livestock farmers, especially dairy and swine, who received Environmental Quality Incentive (EQIP) grants during 2002 for waste-handling renovations should be careful to watch the way their tax preparers handle the grants on income tax returns, says Joe Horner, commercial agriculture dairy and beef economist at the University of Missouri.
“Proper tax reporting of the EQIP grant by your preparer might save you thousands of dollars in income tax that you might not owe.”
Many tax preparers are unfamiliar with the larger EQIP grants even though they may be familiar with Soil and Water Conservation District and Farm Service Agency cost-share programs.
“When they receive a 1099 form from the FSA office, many tax preparers automatically include the income of Schedule F,” Horner said. “And, they either list the expenses incurred as soil and water conservation expenses on schedule F or on the depreciation schedule just as they have always done with cost-share grants.”
The problem for those who have EQIP grants is that the Internal Revenue Service rules farmers can only expense a maximum of 25 percent to their gross income as soil and water expense in any one year. Any additional expenses are carried forward to be used in future years.
“This hasn't been a problem for most livestock producers in the past because the grants they received were small compared to their gross incomes,” Horner said.
However, with new, larger EQIP grants some producers are receiving grants equal to, or larger than, their annual gross income. That creates large tax liabilities if the standard tax treatment for cost-share grants is followed. “Luckily,” Horner said, “a special section of the IRS code — I.R.C. 126 — is designed to exclude large capital project cost-share payments from both taxable income and expenses.
“If you had a large EQIP grant in 2002 you may want to take the appropriate reference material on I.R.C. 126 to your tax preparer along with your tax records,” he says. “This will insure that your preparer is familiar with section 126 and does the proper research on treatment of your EQIP grant.”