Farmers Must Include Market Facilitation Payments in Gross Income

Farmers who receive payments in 2019 under the U.S. Department of Agriculture’s Market Facilitation Program (MFP) must include the payments in gross income. They also generally must include the payments in self-employment income.

The IRS Office of Chief Counsel originally provided this advice last year, and the draft of the 2019 Instructions for Form 1040, Schedule F, Profit or Loss from Farming, includes MFP payments among taxable government program payments.

MFP Offsets Effect of Chinese Tariffs

During 2019, the MFP is expected to pay some $14.5 billion to farmers who are hurt by retaliatory tariffs China imposed on U.S. agricultural products. The MFP payments are intended to make up for the depressed prices of certain commodities caused by the tariffs.

MFP Similar to Prior Programs

The Chief Counsel noted that the Market Facilitation Program has some similarities with prior agricultural program payments intended to compensate farmers for lost income when market prices were low. These payments were called counter-cyclical payments, or price loss coverage payments.

The IRS stated in Publication 225 and in the Instructions for Schedule F that counter-cyclical payments and price loss payments are includible in gross income, just like other agricultural program payments.

Counter-cyclical payments were payments that producers of specified crops received when market prices were low. They were calculated as the difference between a crop’s target price and a lower season-average market price.

Like MFP payments, counter-cyclical and price loss payments had eligibility requirements and overall payment caps. However, unlike MFP payments, they did not depend on current production. Instead they were triggered when market prices were below a set amount.

Subsidy Payments Are Gross Income

The Chief Counsel noted that regulations require farmers to include income replacement subsidy or conservation payments in gross income. Also, courts have consistently held that:

  1. payments intended to compensate for lost profits must be included in gross income; and
  2. government subsidy and conservation payments are includible in gross income.

In addition, the IRS has issued a number of revenue rulings requiring farmers to include in  gross income subsidy or conservation payments, including payments intended to compensate for lost profits.

Market Facilitation Program payments are government subsidies paid to compensate farmers of specified crops for lost profits. There is currently no legislation excluding these payments from gross income. Thus, under the caselaw and IRS guidance, MFP payments are includible in gross income.

By Robert Recchia, J.D., M.B.A., C.P.A.

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All stories by: CCHTaxGroup