|Missouri Dairy Business Update|
|Volume 2, Number 12|
Several dairymen in Missouri have received large Environmental Quality Incentive Program, (EQIP), grants this year for waste handling renovations. If you received an EQIP grant, be careful to watch the way your tax preparer handles the grant on your tax return. Careful EQIP tax treatment by your tax preparer might save you tens of thousands of dollars in income taxes that you might not owe on the grant.
Many tax preparers are unfamiliar with these potentially larger EQIP grants, while they are very familiar with the SWCD and FSA regular cost share programs. When they receive the 1099 form from the FSA office, many tax preparers will automatically include the income on your schedule F and either list the expenses incurred as soil and water conservation expenses on your schedule F, or on your depreciation schedule, just as they have always done with cost share grants.
The problem for you is that under IRS rules, farmers can only expense a maximum of 25% of their gross income as soil and water expense in any one year. Any additional expenses are carried forward to be used in future years. This hasn't been a problem for most dairymen in the past because the grants they received were small compared to their gross income. With these new larger EQIP grants, however, some dairymen are receiving EQIP grants that are equal to, or larger than, their annual gross income, creating large tax liabilities if the standard tax treatment for cost share grants is followed.
Luckily, there is a special section of the IRS code, (I.R.C. 126), designed to exclude large capital project, cost-share payments from both taxable income and expenses. If you have a large EQIP grant this year, you may want to take the following reference material on I.R.C. 126 to your tax preparer, along with your tax records - just to make sure he or she is familiar with section 126, and does the proper research on treatment of your EQIP grant.