Have you scheduled an appointment yet with a tax advisor? With the complexity of the tax code and the growing complexity of agriculture it is hard for individual farm operators to keep track of all of the changes. For example, how is income treated from that wind turbine that is on your property? Or what was the final decision on CRP payments and self-employment tax? Yes, many farmers are affected by those issues, and that is why we’ll address those.
Your tax advisor studies for 10 months just to be able to do two months worth of work in preparing farm tax returns. And in many cases 10 months is not enough. If your tax advisor is not a specialist in farm taxes, refer him or her to a rather comprehensive tax guide for farmers published by farm tax specialists Robert Holcomb and Gary Hachfeld at the University of Minnesota.
Wind farms are controversial. While farm land owners which are receiving rental payments are happy with the arrangement, neighbors without the income are not pleased with them, and there are many other opponents for a variety of reasons. If you are receiving a rental payment from a wind turbine, it may have begun with several different kinds of payments, all differently treated by the U.S. tax code and the IRS.
Holcomb and Hachfeld say the purchase of the easement, either to locate or access the turbine site or the underground cable carrying the power away from the turbine is considered a sale of part of the rights to the land, even though you continue to own it. For that acre or so required by the turbine, you will need to allocate your basis in the property (the value which you paid or its value at an inheritance) affected by the easement. The tax specialists say the basis in the property affected by the easement, must further be allocated between the rights that are sold to the wind farm developer and the rights that are retained for the farming operation. They say if that is impossible, then the amount received for the easement must be compared to the entire basis in the affected property.
You may also have been paid for crop damage, and that would go to the operator of the farm if the operator and owner are different. Crop damage payments are considered sale of crops.
Annual rental payments, regardless of how they are calculated, go to the land owner and are reported on Schedule E, supplemental income and loss. They are not subject to self employment tax., and you will likely not have any expenses to deduct.
Regarding rental payments, one issue that never fades is rental payments for Conservation Reserve Program (CRP) acres. Holcomb and Hachfeld say recent legislation indicates that CRP payments are not subject to self employment tax, if the recipient is receiving social security retirement, survivor, or disability payments. Others receiving CRP payments would be subject to self employment tax.
Tax filing for farmers is less than two months away, and issues can be quite complex. Wind farms have brought in new income, but new details on reporting income. CRP payments are received by many Cornbelt land owners, and unless you are on Social Security, those CRP rental payments are subject to self employment tax.
Source: FarmGate blog