Hyden, Miron & Foster, PLLC Law Blog

Tuesday, November 11, 2014

Arkansas Landowners Win Victory in Self-Employment Tax Case

In a victory for Arkansas property owners, the Eighth Circuit Court of Appeals has ruled that payments from the Conservation Reserve Program (CRP) are not self-employment income subject to self-employment tax. In Morehouse v. Commissioner, a three-judge panel overturned a decision by the Tax Court that allowed the IRS to assess self-employment tax on landowners who were not engaged in the trade or business of farming but who were enrolled in the CRP.  

In the CRP, landowners sign a contract with the United States Department of Agriculture promising to follow conservation measures on their land.  In exchange, the USDA makes payments to the landowners.  Conservation measures include seeding cover crops and maintaining weeds.  The IRS viewed this activity as farming—a form of trade or business—and required landowners to pay self-employment tax.   

The Circuit Court concluded that, in fact, the payments are rental income, excluded from employment tax.  CRP payments to active farmers are still taxable as self-employment, unless the farmer falls under the protection of the 2008 Farm Bill which exempts farmers receiving social security income from self-employment tax on CRP income. Still, non-farmers and farm landlords who are not "materially participating" in farming may now treat CRP payments as real estate rent.  

Whether treating the income from a farm as rental income instead of self-employment income is advantageous is something that property owners and farm landlords must weigh after consulting with their tax advisors. There may be tax considerations that go beyond the issue the Court resolved.

Whether you are a passive landholder or actively engaged in a trade or business, our attorneys can advise you on how to reduce your tax exposure in the short- and long-term.  The expert Arkansas attorneys at Hyden, Miron & Foster, PLLC can advise you on practical and legal aspects of tax strategy in all types of business activities and investment.  Call (501) 376-8222 for a consultation today.

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