Consider tax implications
of EQIP grants

Farmers receiving EQIP (Environmental Quality Incentive Program) grants in 2003 would be smart to read up on Section 126 of the tax code—or make sure your tax preparer does.

That's the heads up from George Caldwell, Texas Farm Bureau's associate director of Commodity and Regulatory Activities.

"Failure to understand how you should report the EQIP costshare and other incentives on your income tax could result in having to pay taxes you don't really owe," says Caldwell.

While most conservation practices partially paid for by EQIP will be reported on the tax form in the same manner as past years, the 2002 farm bill has caused some changes.

Under the new farm legislation, the limit for all EQIP contracts has been increased to up to $450,000. Also, notes Caldwell, it allows more of the incentive payment to fall within the same tax year.

Under the limited-resource provision, the EQIP participant may qualify for 90 percent costshare, which is well beyond the 75 percent typically paid. As a general rule, government payments are reported as taxable income. Section 126, however, allows the producer an exclusion.

In a nutshell, after calculating the value of the Section 126 improvement, exclude the present value of the greater of: 1) 10 percent of the average gross receipts from the affected acreage; or 2) $2.50 times the number of affected acres.

Not all EQIP grants qualify for special treatment, but the "big ticket" grants very well may. In fact, where Section 126 can be applied, the tax liability in proportion to the EQIP payment can be reduced considerably and, in some instances, eliminated altogether.