Agricultural Program Payments

You must include in income most government payments, such as those for approved conservation practices, livestock indemnity payments, or livestock forage disaster payments whether you receive them in cash, materials, services, or commodity certificates. However, you can exclude from income some payments you receive under certain cost-sharing conservation programs if there is a corresponding reduction in basis of a related improvement. See Cost-Shar- ing Exclusion (Improvements) , later.

Report the agricultural program payment on the appropriate line of Schedule F, Part I. Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Market Assistance Loans (MALs). However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. Claim the deduction on Schedule F, Part II, for the year of repayment or reduction.

Table 3-3. Income from Renting Machinery or Equipment

(MALs)

Generally, you don’t report loans you receive as income. However, if you pledge part or all of your production to secure a MAL, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. You don’t need approval from the IRS to adopt this method of reporting MALs.

Once you report a MAL as income for the year received, you must generally report all MALs in that year and later years in the same way. However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the Commodity Credit Corporation (CCC), from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. Revenue Procedure 2008-52, 2008-36 I.R.B. 587, is available at IRS.gov/irb/2008-36_IRB#NOT-2008-52 .

You can request income tax withhold-

TIP ing from MAL payments you receive.

Use Form W-4V. See How To Get Tax Help for information about ordering the form.

To elect to report a MAL as income, include the loan proceeds as income on Schedule F for the year you receive it. Attach a statement to your return showing the details of the loan.

You must file the statement and the return by the due date of the return, including extensions. If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed pursuant to section 301.9100-2” at the top of the return. File the amended return at the same address you filed the original return.

When you make this election, the amount you report as income becomes your basis in the commodity. See chapter 6 for information on the basis of assets. If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F.

If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. If you didn’t report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture.

Form 1099-A. If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A. “CCC” should be shown in box 6. The amount of any MAL outstanding when you forfeited your commodity should also be indicated on the form.

Market Gain

Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. Market gain should be reported as follows.

• If you elected to include the MAL in income in the year you received it, don’t include the market gain in income. However, reduce (adjust) the basis of the commodity for the amount of the market gain.

• If you didn’t include the MAL in income in the year received, include the market gain in your income.

The following examples show how to report market gain.

Example 1. Mike Green is a cotton farmer. He uses the cash method of accounting and files his tax return on a calendar-year basis. He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. In 2024, Mike pledged 10,000 pounds of cotton as collateral for a MAL of $5,200 (a loan rate of $0.52 per pound). In 2025, he repaid the loan and redeemed the cotton for $4,000 when the world price was $0.40 per pound (lower than the loan amount). Later in 2025, he sold the cotton for $6,500. The market gain on the redemption was $0.12 ($0.52 – $0.40) per pound. Mike realized total market gain of $1,200 ($0.12 x 10,000 pounds). How he reports this market gain and

12 Chapter 3 Farm Income Publication 225 (2025)

figures his gain or loss from the sale of the cotton depends on whether he included MALs in income in 2024.

Included MAL. Mike reported the $5,200 MAL as income for 2024 on Schedule F, line 5a, so he is treated as if he sold the cotton for $5,200 when he pledged it and repurchased the cotton for $4,000 when he redeemed it. The $1,200 market gain isn’t recognized on the redemption. He reports it for 2025 as an agricultural program payment on Schedule F, line 4a, but doesn’t include it as a taxable amount on line 4b.

Mike’s basis in the cotton after he redeemed it was $4,000, which is the redemption (repurchase) price paid for the cotton. His gain from the sale is $1,200 ($5,200 – $4,000). He reports the $5,000 sale on line 1a and the $4,000 basis on line 1b. After subtracting his basis from the sale, Mike will have a $1,200 gain for 2025 on Schedule F, line 1c.

Excluded MAL. Mike didn’t elect to report the $5,200 MAL as income and therefore didn’t include it on his 2024 Schedule F. When he paid $4,000 to pay off the loan in 2025, he had to recognize $1,200 of income from market gain.

Example 2. The facts are the same as in Example 1, except that, instead of selling the cotton for $6,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. Under that contract, Mike authorized the cotton buyer to pay the MAL on Mike’s behalf. In 2025, the cotton buyer repaid the loan for $4,000 and immediately exercised his option, buying the cotton for $4,000. How Mike reports the $1,200 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included MALs in income in 2024.

Included MAL. As in Example 1, Mike is treated as though he sold the cotton for $5,200 when he pledged it and repurchased the cotton for $4,000 when the cotton buyer redeemed it for him. The $1,200 market gain isn’t recognized on the redemption. Mike reports it for 2025 as an agricultural program payment on Schedule F, line 4a, but doesn’t include it as a taxable amount on line 4b.

Also, as in Example 1, Mike’s basis in the cotton when the cotton buyer redeemed it for him was $4,000. Mike has no gain or loss on its sale to the cotton buyer for that amount.

Excluded MAL. As in Example 1, Mike didn’t report the $5,200 loan as income in 2024 and must recognize $1,200 of income from market gain in 2025.

Conservation Reserve Program (CRP)

Under the CRP, if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. You must include the annual payments and any one-time incentive payment you receive under the program on the appropriate lines of Schedule F. Cost-share payments you receive may qualify for the cost-sharing

exclusion. See Cost-Sharing Exclusion (Im- provements), later. CRP payments are reported to you on Form 1099-G.

Individuals who are receiving social se-

TIP curity retirement or disability benefits

may exclude CRP payments when cal- culating self-employment tax. See the Instruc- tions for Schedule SE (Form 1040).

Crop Insurance and Crop Disaster Payments

You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. Livestock insurance plans, such as livestock gross margin (LGM) and livestock risk protection (LRP) are also considered crop insurance. You generally include them in the year you receive them. Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster.

You can request income tax withhold-

TIP ing from crop disaster payments you

receive from the federal government. Use Form W-4V. See How To Get Tax Help for information about ordering the form.

Election to postpone reporting until the fol- lowing year. You can postpone reporting eligible crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions.

• You use the cash method of accounting.

• You receive the crop insurance proceeds in the same tax year the crops are damaged.

• You can show that under your normal business practice you would have included more than 50% of the income from the damaged crops in any tax year following the year the damage occurred.

Proceeds received from revenue insurance policies may be the result of either yield loss due to physical damage or to decline in price from planting to harvest. For these policies, only the amount of the proceeds received as a result of yield loss can be deferred. Proceeds received from weather insurance policies cannot be deferred if the payment is based on rainfall amounts and is not a result of physical damage to a crop.

To postpone reporting eligible crop insurance proceeds received in 2025, report the amount you received on Schedule F, line 6a, but don’t include it as a taxable amount on line 6b. Check the box on line 6c and attach a statement to your tax return. The statement must include your name and address and contain the following information.

• A statement that you’re making an election under section 451(f) and Regulations section 1.451-6.

• The specific crop or crops physically destroyed or damaged.

• A statement that under your normal business practice you would have included more than 50% of the income from some or all of the destroyed or damaged crops in

gross income for a tax year following the year the crops were destroyed or damaged.

• The cause of the physical destruction or damage and the date or dates it occurred.

• The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment.

• The name of each insurance carrier from whom you received payments.

One election covers all crops representing a single trade or business. If you have more than one farming business, make a separate election for each one. For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms.

An election is binding for the year unless the IRS approves your request to change it. To request IRS approval to change your election, write to the IRS at the following address, giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it.

Ogden Submission Processing Center P. O. Box 9941 Ogden, UT 84409

Feed Assistance and Payments

The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. They also include the donation or sale at a below-market price of feed owned by the CCC.

Include in income:

• The market value of donated feed received,

• The difference between the market value and the price you paid for feed you buy at below-market prices, and

• Any cost reimbursement you receive.

You must include these benefits in income in the year you receive them. You can’t postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. Report the benefits on Schedule F, Part I, as agricultural program payments. You can usually take a current deduction for the same amount as a feed expense.

Cost-Sharing Exclusion (Improvements)

You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. However, see Effects of the exclusion, later. A payment is any economic benefit you get as a result of an

Publication 225 (2025) Chapter 3 Farm Income 13

improvement. However, this exclusion applies only to that part of a payment that meets all three of the following tests.

1. It was for a capital expense. You can’t exclude any part of a payment for an expense you can deduct in the year you pay or incur it. You must include the payment for a deductible expense in income, and you can take any offsetting deduction. See

chapter 5 for information on deducting soil and water conservation expenses.

2. It doesn’t substantially increase your annual income from the property for which it’s made. An increase in annual income is substantial if it’s more than the greater of the following amounts.

a. 10% of the average annual income

derived from the affected property before receiving the improvement.

b. $2.50 times the number of affected

acres.

3. The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.

Qualifying programs. If the three tests listed above are met, you can exclude part or all of the payments from the following programs.

• The rural clean water program authorized by the Federal Water Pollution Control Act.

• The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977.

• The water bank program authorized by the Water Bank Act.

• The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978.

• The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act.

• The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act.

• The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act.

• Certain small watershed programs, listed later.

• Any program of a state, territory of the United States, a political subdivision of any of these, or of the District of Columbia, under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. Several state programs have been approved. For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS).

Small watershed programs. If the three tests listed earlier are met, you can exclude part

or all of the payments you receive under the following programs for improvements made in connection with a watershed.

• The programs under the Watershed Protection and Flood Prevention Act.

• The flood prevention projects under the Flood Control Act of 1944.

• The Emergency Watershed Protection Program under the Flood Control Act of 1950.

• Certain programs under the Colorado River Basin Salinity Control Act.

• The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996, and the Farm Security and Rural Investment Act of 2002.

• The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of

• The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996.

• The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000.

• The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000.

• The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996.

• The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002.

• The Conservation Security Program authorized by the Food Security Act of 1985.

• The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978.

Income realized. The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any).

Value of the improvement. You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items.

• Any government payments under a program not listed earlier.

• Any part of a government payment under a program listed earlier that the Secretary of Agriculture hasn’t certified as primarily for conservation.

• Any government payment to you for rent or for your services.

The denominator of the fraction is the total cost of the improvement.

Excludable portion. The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts.

1. 10% of the prior average annual income from the affected acreage. The prior

average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement.

2. $2.50 times the number of affected acres.

The calculation of present fair market