Income Taxes, Self-Employment, and Social Security
In general, landlords of cash rent arrangements are not considered actively participating in the business of farming. This means the income is not treated as self-employment income, does not count toward social security benefits in retirement, USDA cost-sharing payments are not excludable from income, and soil and water conservation expenses and the costs of lime and fertilizer are not deductible for federal income tax purposes. For landlords involved in a crop-share or livestock-share agreement, the determination of such matters will, in large part, depend on whether there is material participation by the landowner in the business. The specific provisions of the lease regarding management and cost-sharing can play an important role in this determination. The parties can also include a provision specifically stating their intentions in regard to material participation.
- This site provides more in-depth information on the tax consequences of your farm lease and your “material participation” in the operation.
- This Iowa State University, Center for Agricultural Law and Taxation (CALT) publication provides a general summary of farm lease law, including tax considerations.
Government Farm Programs
The type of lease agreement can impact the distribution of payments from the Direct and Counter-cyclical Program (DCP) and the Average Crop Revenue Election (ACRE) program. There has been some confusion regarding the sharing of program payments. In essence, a landlord cannot receive a share of the payments unless they are “actively engaged in farming,” which means their contribution to the operation must be significant and at risk. Therefore, a cash lease does not qualify a landlord for a share of DCP payments, while a crop share lease does.
Confusion has developed in regard to payment sharing under flexible, or adjustable, cash leases. Basically, for purposes of DCP payments, to constitute a share lease the amount of rent must be tied to the production or revenue of the specific farm. This means that if the landowner receives a cash amount based on the price at a specific market or a county yield average the lease is most likely a cash lease, and the landowner is not due any payment.
In addition, leases that establish a guaranteed amount of cash or a specified amount of the crop and are then adjusted by factors such as yield or price are considered cash rent leases. Similarly, leases that use bonuses for unexpectedly high yield or revenue are considered cash agreements.
In order to ensure the parties intentions regarding DCP and ACRE payments are fulfilled, it is recommended a written lease with the signatures of both parties indicate the nature of the lease and the desired division of payments. The parties should also visit their local FSA office with a copy of their lease and explain their intentions. The type of lease can have similar effects on payments from other programs, such as the Crop Disaster Program and Loan Deficiency Payments.
Determination of DCP and ACRE payments based on the type of lease entered is governed by Title 7, Section 1412.54 of the U.S. Code of Regulations.
The FSA Handbook guiding the DCP and ACRE programs provides examples of farm leases and the outcome of their determination as cash or crop-share arrangements.
In this example, the lease agreement specifies that the rent is based on a share of the gross revenue of the crop proceeds. The rental amount is equal to $142.80 per acre based on the following variables:
- rent equal to 40 percent of the gross crop value
- guaranteed minimum yield of 170 bushels per acre
- actual price of $2.10 per bushel.
While the landowner does not actually receive 40 percent of the crop produced, this lease shall be considered a cash lease because other rental amount is based on a guaranteed sum or minimum amount.
In this example, the lease agreement specifies that there is a base, or minimum, cash rent amount that must be paid, but the landowner receives a share of the gross revenue in excess of the base value. The rental amount is based on the following variables:
- base, or minimum, cash rent is $100 per acre
- additional rent is 50 percent of the gross revenue in excess of $250 per acre
- yield of 52 bushels per acre
- price of $6.50 per bushel.
While the landowner does not actually receive 50 percent of the crop produced, this lease shall be considered a “combination” lease or cash lease because the lease agreement includes a guaranteed amount and an additional amount based on a share of the crop proceeds.
In this example, the lease agreement specifies that the cash rent is based on a fixed number of bushels; however, the price is based on the value that will be set on a future date, but it is not based on the actual price received by the producer. The rental amount is based on the following variables:
- fixed number of bushels is 55 bushels per acre
- actual price is the price at the local elevator on December 1.
This lease shall be considered a cash lease.