Agricultural Program Payments You must include in income most government payments, such as thosefor approved conservation practices and production flexibilitycontracts, whether you receive them in cash, materials, services, orcommodity certificates. However, you can exclude some payments youreceive under certain cost-sharing conservation programs. SeeCost-Sharing Exclusion (Improvements), later. Report the agricultural program payment on the appropriate line inPart I of Schedule F. Report the full amount even if you return agovernment check for cancellation, refund any of the payment youreceive, or the government collects all or part of the payment fromyou by reducing the amount of some other payment or Commodity CreditCorporation loan. However, you can deduct the amount you refund orreturn or that reduces some other payment or loan to you. Claim thededuction on Schedule F for the year of repayment or reduction. Refundsof AgriculturalProgram Expenses Refunds of malting barley assessments.A farmer who participates in the malting barley production programof the Commodity Credit Corporation (CCC) receives a barley subsidybenefit and pays a malting barley assessment. The barley subsidybenefit is reported to the farmer and to the IRS on FormCCC-1099-G, Certain Government Payments. If thefarmer does not sell the barley for malting purposes, the farmer iseligible to receive a refund of the malting barley assessment. If thefarmer receives the refund in a year after the assessment was paid,how the farmer reports the refund depends on whether the farmerclaimed the assessment as an expense in the year it was paid. Thefollowing example shows how to report refunds of malting barleyassessments. Example.Lee White is a farmer. He uses the cash method of accounting andfiles his tax return on a calendar year basis. He participated in themalting barley production program and received a $2,850 payment fromthe CCC in 1998. The payment was Lee's $3,000 barley subsidy benefitless the malting barley assessment ($150) he had to pay for the barleyproduced. Lee received a Form CCC-1099-G for 1998 showingthe $3,000 barley subsidy benefit. In 1999, Lee proved that he did notsell the barley for malting purposes and received a refund of the $150malting barley assessment. He receives a 1999 FormCCC-1099-G for the refund showing a "Barley AssessmentDeficiency" of $150. Assessment claimed as an expense.For 1998, Lee reported $3,000 of farm income from the barleysubsidy benefit. He claimed the $150 malting barley assessment as afarm expense in Part II of his 1998 Schedule F (Form 1040). Leereceived a tax benefit from the deduction because it reduced his 1998tax liability. Lee includes the $150 refund (barley assessmentdeficiency) as income in Part I of his 1999 Schedule F (Form 1040). Assessment not claimed as an expense.For 1998, Lee reported the $3,000 barley subsidy benefit as income,but did not claim the $150 assessment as an expense. Because Leereceived no tax benefit from the payment of the assessment in 1998, hedoes not include the refund (barley assessment deficiency) as incomefor 1999. He includes the $150 refund on line 6a of Schedule F, butdoes not include it as a taxable amount on line 6b. Payments made under the Dairy Refund Payment Program (DRPP).The DRPP, administered by the CCC, refunds the reductions in pricereceived by eligible producers during a calendar year. Milkprocessors, milk handlers, and others responsible for the marketing ofmilk withhold the reductions in price from their payments to theproducers and send the withheld amounts to the CCC. If the producercan prove that milk marketing for the current year was not more thanmilk marketing for the prior year, the producer is eligible for arefund of the reductions in price. Typically, an eligible producerreceives a refund of the reductions in price in a year after thereductions occurred. Proper reporting of the refund depends on whetherthe producer claimed the reductions in price as an expense in the yearthey occurred. The following example shows how to report refunds ofreductions in price. Example.Sam Brown is a milk producer. He uses the cash method of accountingand files his tax return on a calendar year basis. The marketing ofSam's milk is subject to reductions in price. In 1998, Sam had grossreceipts of $200,000 from milk sales and had $3,000 withheld asreductions in price. Sam proved that his 1998 milk marketing was notmore than his 1997 marketing. In 1999, Sam received a $3,000 refundfrom the CCC of the 1998 reductions in price. Sam receives a 1999 FormCCC-1099-G for the refund showing a "Milk MarketingFee" of $3,000. Reductions claimed as an expense.For 1998, Sam reported $200,000 of farm income from milk sales. Heclaimed the $3,000 reductions in price as a farm expense in Part II ofhis 1998 Schedule F (Form 1040). Sam received a tax benefit from thededuction because it reduced his 1998 tax liability. Sam includes the$3,000 refund (milk marketing fee) as income in Part I of his 1999Schedule F (Form 1040). Reductions not claimed as an expense.For 1998, Sam reported milk sales income of $200,000, but did notclaim the reductions in price for his milk as an expense. Because Samreceived no tax benefit from the reductions in price in 1998, he doesnot include the refund (milk marketing fee) as income for 1999. Heincludes the $3,000 refund on line 6a of Schedule F, but does notinclude it as a taxable amount on line 6b. Commodity Credit Corporation (CCC) Loans Normally, you do not report loans you receive as income, and youreport income from a crop for the year you sell it. However, if youpledge part or all of your production to secure a CCC loan, you canchoose to treat the loan as if it were a sale of the crop and reportthe loan proceeds as income for the year you receive them. You do notneed permission from the IRS to adopt this method of reporting CCCloans, even though you may have reported those received in earlieryears as taxable income for the year you sold the crop. Once you report a CCC loan as income for the year received, youmust report all CCC loans in that year and later years in the sameway, unless you get permission from the IRS to change to a differentmethod. See Change in Accounting Method in chapter 3. TaxTip: You can request income tax withholding on CCC loan payments made toyou. Use Form W-4V, Voluntary Withholding Request.See chapter 21for information about ordering the form. To make the choice to report a loan as income, include the loan asincome on line 7a of Schedule F for the year you receive it. Attach astatement to your return showing the details of the loan. When you make this choice, the amount you report as income becomesyour basis in the commodity. See chapter 7for information on thebasis of assets. If you later repay the loan, redeem the pledgedcommodity, and sell it, you report as income at the time of sale thesale proceeds minus your basis in the commodity. If thesale proceeds are less than your basis in the commodity, you canreport the difference as a loss on Schedule F. If you forfeit the pledged crops to the CCC in full payment of theloan, the forfeiture is treated for tax purposes as a sale of thecrops. If you did not choose to report the loan proceeds as income forthe year you received them, you must include them in your income forthe year of the forfeiture. If you chose to report the loan proceedsas income for the year you received them, and the amount of theforfeited loan is less than your basis in the commodity, you canreport the difference as a loss on Schedule F. Market Gain Under the CCC nonrecourse marketing assistance loan program, yourrepayment amount for a loan secured by your pledge of an eligiblecommodity is generally based on the lower of the loan rate or theprevailing world market price for the commodity on the date ofrepayment. If you repay the loan when the world price is lower, thedifference between that repayment amount and the repayment amountbased on the loan rate is market gain. You will receive a FormCCC-1099-G, Certain Government Payments,showing the market gain you realized. If you chose to includethe CCC loan in income in the year you received it, do not include theamount shown on Form CCC-1099-G in income. The followingexamples show how to report market gain. Example 1.Mike Green is a cotton farmer. He uses the cash method ofaccounting and files federal income tax returns on a calendar yearbasis. He has currently deducted all expenses incurred in producingthe cotton and has a zero basis in the commodity. In 1998, Mikepledged 1,000 pounds of cotton as collateral for a CCC price supportloan of $500 (a loan rate of $.50 per pound). In 1999, he repaid theloan and redeemed the cotton for $420 when the world price was $.42per pound. Later in 1999, he sold the cotton for $600. The market gain on the redemption was $.08 ($.50 - $.42) perpound. Mike received a Form CCC-1099-G from the CCCshowing market gain of $80 ($.08 x 1,000 pounds). How he reports thismarket gain and figures his gain or loss from the sale of the cottondepends on whether he chose to include CCC loans in income in 1998. With choice.Because Mike reported the $500 CCC loan as income for 1998, he istreated as though he sold the cotton for $500 when he pledged it andrepurchased the cotton for $420 when he redeemed it. The $80 marketgain is not recognized on the redemption. He reports it for 1999 as an"Agricultural program payment" on line 6a of Schedule F, but doesnot include it on line 6b as taxable income. Mike's basis in the cotton after he redeemed it was $420, which isthe redemption (repurchase) price paid for the cotton. His gain fromthe sale is $180 ($600 - $420). He reports it as income for 1999on line 4 of Schedule F. Without choice.Mike has income of $80 from market gain in 1999. He reports it onboth line 6a and line 6b of Schedule F. Because his basis in thecotton is zero, his gain from its sale is $600. He reports the $600gain as income for 1999 on line 4 of Schedule F. Example 2.The facts are the same as in Example 1 except that, instead ofselling the cotton for $600 after redeeming it, Mike entered into anoption-to-purchase contract with Tom Merchant before redeeming thecotton. Under that contract, Mike authorized Tom to pay the CCC loanon Mike's behalf. In 1999, Tom repaid the loan for $420 andimmediately exercised his option, buying the cotton for $420. How Mikereports the $80 market gain on the redemption of the cotton andfigures his gain or loss from its sale depends on whether he chose toinclude CCC loans in income in 1998. With choice.As in Example 1, Mike is treated as though he sold the cotton for$500 when he pledged it and repurchased the cotton for $420 when Tomredeemed it for him. The $80 market gain is not recognized on theredemption. Mike reports it for 1999 as an "Agricultural programpayment" on line 6a of Schedule F, but does not include it on line6b as taxable income. Also as in Example 1, Mike's basis in the cotton when Tom redeemedit for him was $420. Therefore, Mike has no gain or loss on its saleto Tom for that amount. Without choice.ERROR MSGAs in Example 1, Mike has income of $80 from market gain in 1999.He reports it on both line 6a and line 6b of Schedule F. Because hisbasis in the cotton is zero, his gain from its sale is $420. Hereports it as income for 1999 on line 4 of Schedule F. Conservation ReserveProgram (CRP) Under the Conservation Reserve Program (CRP), if you own or operatehighly erodible or other specified cropland, you may enter into along-term contract with the USDA, agreeing to convert to a lessintensive use of that cropland. You must include payments under theprogram in your income, whether received in cash, commoditycertificates, or a combination of cash and certificates. Crop Insurance andCrop Disaster Payments You must include in income any crop insurance proceeds you receiveas the result of crop damage. You generally include them in the yearyou receive them. Treat as crop insurance proceeds the crop disasterpayments you receive from the federal government as the result ofdestruction or damage to crops, or the inability to plant crops,because of drought, flood, or any other natural disaster. TaxTip: You can request income tax withholding from crop disaster paymentsyou receive from the federal government. Use Form W-4V,Voluntary Withholding Request. See chapter 21forinformation about ordering the form. Choice to postpone reporting until the following year.If you use the cash method of accounting and receive crop insuranceproceeds in the same tax year in which the crops are damaged, you canchoose to postpone reporting the proceeds as income until thefollowing tax year. You can make this choice if you can show you wouldhave included income from the damaged crops in any tax year followingthe year the damage occurred. To choose to postpone reporting crop insurance proceeds received in1999, report the amount you received on line 8a of Schedule F, but donot include it as taxable income on line 8b. Check the box on line 8cand attach a statement to your tax return. The statement must includeyour name and address and contain the following information. A statement that you are making a choice under section451(d) of the Internal Revenue Code and section 1.451-6 of theregulations. The specific crop or crops destroyed or damaged. A statement that under your normal business practice youwould have included income from the destroyed or damaged crops ingross income for a tax year following the year the crops weredestroyed or damaged. The cause of the destruction or damage and the date or datesit occurred. bed and breakfast ArendalThe total amount of payments you received from insurancecarriers, itemized for each specific crop, and the date you receivedeach payment. The name of each insurance carrier from whom you receivedpayments. One choice covers all crops representing a single trade orbusiness. If you have more than one farming business, make a separatechoice for each one. For example, if you operate two separate farms onwhich you grow different crops, and you keep separate books for eachfarm, you should make two separate choices to postpone reportinginsurance proceeds you receive for crops grown on each of your farms. A choice is binding for the year. To request IRS approval to changeyour choice, write to your IRS District Director giving your name,address, identification number, the year you made the choice, and yourreasons for wanting to change it. Feed Assistanceand Payments The Disaster Assistance Act of 1988 authorizes programs to providefeed assistance, reimbursement payments, and other benefits toqualifying livestock producers if the Secretary of Agriculturedetermines that, because of a natural disaster, a livestock emergencyexists. These programs include partial reimbursement for the cost ofpurchased feed and for certain transportation expenses. They alsoinclude the donation or sale at a below-market price of feed owned bythe Commodity Credit Corporation. You must include these benefits in income in the year you receivethem. You cannot postpone reporting them under the rules explainedearlier for weather-related sales of livestock or crop insuranceproceeds. Report the benefits in Part I, Schedule F, as agriculturalprogram payments. Include in income the market value of donated feed, the differencebetween the market value and the price you paid, or any costreimbursement you receive. You can usually take a current deductionfor the same amount as a feed expense. Cost-SharingExclusion (Improvements) You can exclude from your income part or all of a payment youreceive under certain federal or state cost-sharing conservation,reclamation, and restoration programs. The "payment" is anyeconomic benefit you get as a result of an improvement. However, thisexclusion applies only to that part of a payment that meets all threeof the following tests. It was for a capital expense. You cannot exclude any part ofa payment for an expense you can deduct in the year you pay or incurit. You must include the payment in income and take any offsettingdeduction. (See chapter 6for information on deducting soil and waterconservation expenses.) It does not substantially increase your annual income fromthe property for which it is made. An increase in annual income issubstantial if it is more than the greater of 10% of the averageannual income derived from the affected property before receiving theimprovement or an amount equal to $2.50 times the number of affectedacres. The Secretary of Agriculture certified that the payment wasmade primarily for conserving soil and water resources, protecting orrestoring the environment, improving forests, or providing a habitatfor wildlife. If the three tests above are met, you can exclude payments from thefollowing programs. The rural clean water program authorized by the FederalWater Pollution Control Act. The rural abandoned mine program authorized by the SurfaceMining Control and Reclamation Act of 1977. The water bank program authorized by the Water BankAct. The emergency conservation measures program authorized bytitle IV of the Agricultural Credit Act of 1978. The agricultural conservation program authorized by the SoilConservation and Domestic Allotment Act. The great plains conservation program authorized by the SoilConservation and Domestic Policy Act. The resource conservation and development program authorizedby the Bankhead-Jones Farm Tenant Act and by the Soil Conservation andDomestic Allotment Act. The forestry incentives program authorized by theCooperative Forestry Assistance Act of 1978. Certain small watershed programs, listed below. Any program of a state, possession of the United States, apolitical subdivision of any of these, or the District of Columbiaunder which payments are made to individuals primarily for conservingsoil, protecting or restoring the environment, improving forests, orproviding a habitat for wildlife. Several state programs have beenapproved. For information about the status of those programs, contactthe state offices of the Farm Service Agency (FSA) and the NaturalResources and Conservation Service (NRCS). You can exclude payments you receive under the following programsfor improvements made in connection with a watershed. The Stewardship Incentive Program under title XII of theFood, Agriculture, Conservation, and Trade Act of 1990. The programs under the Watershed Protection and FloodPrevention Act of 1954. The flood prevention projects under the Flood Control Act of1944. The Emergency Watershed Protection Program under the FloodControl Act of May 17, 1950. Certain programs under the Colorado Basin Salinity Act of1974. The wetlands reserve program authorized by title XII of theFood Security Act of 1985 and by the Federal Agriculture Improvementand Reform Act of 1996. The environmental quality incentive program authorized bythe Federal Agriculture Improvement and Reform Act of 1996. The wildlife habitat incentives program authorized by theFederal Agriculture Improvement and Reform Act of 1996. Income realized.The gross income you realize upon getting an improvement underthese cost-sharing programs is the value of the improvement reduced bythe sum of the excludable portion and your share of the cost of theimprovement. Value of the improvement.You determine the value of the improvement by multiplying its fairmarket value (defined in chapter 12)by a fraction. The numerator ofthe fraction is the total cost of the improvement (all amounts paideither by you or by the government for the improvement), reduced bythe sum of the following three items. Any government payments under a program not listedearlier. Any portion of a government payment under a program listedearlier that the Secretary of Agriculture has not certified asprimarily for purposes of conservation. Any government payment to you for rent or for yourservices. The denominator of the fraction is the total cost of theimprovement. Excludable portion.The excludable portion is the present fair market value of theright to receive annual income from the affected acreage of thegreater of the following amounts. 10% of the prior average annual income from the affectedacreage. The "prior average annual income" is the average of thegross receipts from the affected acreage for the last 3 tax yearsbefore the tax year in which you started to install theimprovement. $2.50 times the number of affected acres. Caution: The calculation of "present fair market value" is too complexto discuss in this publication. You may need to consult your taxadvisor for assistance. Example.One hundred acres of your land was reclaimed under a contract withthe Natural Resources Conservation Service of the USDA. The total costof the improvement was $500,000. The USDA paid $490,000. You paid$10,000. The value of the cost-sharing improvement is $15,000. The present fair market value of the right to receive (1) above is$1,380 and the value of the right to receive (2) is $1,550. Theexcludable portion is the greater amount, $1,550. You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000 Excludable portion      1,550     11,550 Amount included in income $3,450 Effects of the exclusion.When you figure the basis of property you acquire or improve usingcost-sharing payments excluded from income, subtract the excludedpayments from your capital costs. Any payment excluded from income isnot part of your basis. In addition, you cannot take depreciation, amortization, ordepletion deductions for the part of the cost of the property forwhich you receive cost-sharing payments you exclude from income. Bruges hotelsHow to report the exclusion.Attach a statement to your tax return (or amended return) for thetax year you receive the last government payment for the improvement.The statement must include the following items. The dollar amount of the cost funded by the governmentpayment. The value of the improvement. The amount you are excluding. Report the total cost-sharing payments you receive on line 6a,Schedule F, and the taxable amount on line 6b. Recapture.If you dispose of the property within 20 years after you get it,you must treat as ordinary income part or all of the cost-sharingpayments you excluded. You must report the recapture on Form 4797. SeeSection 1255 property under cheap hotels in LagosOther Farm Propertyin chapter 11. Choosing not to exclude payments.You can choose not to exclude all or part of anypayments you receive under these programs. You must make this choiceby the due date, including extensions, for filing your return. If youtimely filed your return for the year without making the choice, youcan still make the choice by filing an amended return within sixmonths of the due date of the return (excluding extensions). Write"Filed pursuant to section 301.9100-2" at the top of theamended return and file it at the same address you filed the originalreturn. If you choose not to exclude these payments, none of the aboverestrictions and rules apply. Other Payments You must include other government program payments in income asexplained below. Fertilizer and Lime Include in income the value of fertilizer or lime you receivedunder a government program. How you claim the offsetting deduction isexplained under Fertilizer and Lime in chapter 5. Improvements If government payments are based on improvements, such as apollution control facility, you must still include them in income. Youmust capitalize the full cost of the improvement. Since you haveincluded the payments in income, they do not reduce your basis.However, see Cost-Sharing Exclusion (Improvements) earlier,for additional information. Payment to MoreThan One Person The USDA reports program payments to the IRS. It reports a programpayment intended for more than one person as having been paid to theperson whose identification number is on record for that payment(payee of record). If you, as the payee of record, receive a programpayment belonging to someone else, such as your landlord, the amountbelonging to the other person is a nominee distribution. You shouldfile Form 1099-G to report the identity of the actual recipientto the IRS. You should also give this information to the recipient.You can avoid the inconvenience of unnecessary inquiries about theidentity of the recipient if you file this form. See chapter 21for information about ordering Form 1099-G.