If you aren't careful that Environmental Quality Incentive Program (EQIP) grant you received to renovate or upgrade your manure-handling system in 2002 could wind up costing you on your taxes, says Joe Horner, dairy and beef economist at the University of Missouri. That's because many tax preparers don't know how to handle EQIP grants on your taxes.
When tax preparers receive a 1099 form from the Farm Service Agency they tend to automatically include the income on your Schedule F — the same way they handle soil and water conservation cost-share programs. They either list it as expenses incurred for soil and water conservation, or on your depreciation schedule, just as they have always done with cost-share grants.
However that's not the best way to handle EQIP grants on your taxes — especially large grants. The reason, explains Horner, is that the Internal Revenue Service allows farmers to expense a maximum of 25 percent of their gross income as soil and water expenses in any one year. Additional expenses are carried forward for use in future years. With these new, larger EQIP grants some producers receive grants that are equal to, or larger than their annual gross income which creates a tax liability when the standard tax treatment for cost-share grants is used.
To avoid those taxes, you need to have your tax preparer use a special section of the IRS code — I.R.C. 126, says Horner. This section of the code is designed to exclude large captial project cost-share payments from both taxable income and expenses.
So, if you received a large EQIP grant in 2002, make sure your tax preparer does the proper research to handle the grant correctly.
University of Missouri Commercial Agriculture newsletter