Agriculture Online
12-04-06
Iowa program targets landowners, beginning farmers
Family members can apply for tax credits on cash rent, crop-share agreements
Jeff Caldwell
Agriculture Online News and Features Editor
Beginning January 1, 2007, established Iowa farmers will have more incentive to
help beginning farmers enter the crop production industry.
On that date, the Iowa Beginning Farmer Tax Credit will go into effect. Initiated
by the Iowa State University Beginning Farmer Center and approved during the
2006 Iowa legislative session, the program, which will be administered by the
Iowa Agricultural Development Authority (IADA), will provide a tax credit ranging
from five to 15% to any eligible taxpayer who transfers assets to a "beginning"
farmer. It's an effort to "inject some youth into agriculture in iowa," according to
Roger McEowen, Iowa State University agricultural law professor.
"More and more of the agricultural land is owned by farmers over 55 and 60
years old, and the number of those 35 and under is dwindling. Twenty percent of
the land is owned by someone out of state and cash-rented," McEowen says.
"This tax credit is kind of a way for beginning farmers to get a foothold in
agriculture."
For asset transfers between two and five years, the landowner can receive a fivepercent credit on cash rental agreements up to a credit of 15% for crop- or
livestock-share agreements.
"The power in this thing is, given the way it's drafted, it's 15% for a crop-share
lease. That's only given $2.30-per-bushel corn. If you take $3.00 to $3.50/bushel
corn, with a half-section of ground, that's $10,000 a year," McEowen says. "You
can wipe off your state income tax in not too much time."
One of the first programs of its kind in the U.S., the Iowa Beginning Farmer Tax
Credit is unique in ways. First, the Iowa law does not mandate an age limit for the
"beginning farmer."
"The prospective tenant (beginning farmer) must have net worth of less than
$300,000," The tax credit law reads. "The beginning farmer must also have
attained age 18 and have sufficient education and training to operate a
production operation and actively participate in the management and labor of the
operation."
Other similar tax credit programs -- like one in Nebraska -- have a "related party"
rule, essentially barring family members from taking advantage of tax credits for
farm asset transfers. The Iowa credit, on the other hand, does allow related
parties to utilize the credit. Because of the paperwork necessary to complete the
tax credit and the financial disclosure therein, McEowen says this factor may
boost utilization of the credit by family operations, largely due to the amount of
financial information that must be disclosed.
"Nebraska has had a beginning farmer credit since 1999, but there's been a
related-party rule that states you can't enter into a related-party agreement. If
that's the case, you have to qualify as a beginning farmer to get the credit to the
landlord, and that landlord is going to want to see a [IRS Form 1040] Schedule F
(Profit or Loss from Farming)," McEowen says, adding Nebraska has taken steps
to allow related parties to take advantage of the tax credit offered there.
"If you have a related-party rule, how many unrelated tenants are going to want
to disclose that information to their landlords? That son is not going to have a
problem showing that information to Dad," he adds. "An unrelated party is not
going to want to disclose their balance sheet to their landlord to get the credit. if
the landlord thinks I'm well-off, how will that affect rental rates? It will harm me
from a negotiation standpoint."
The law's only provision for family members regarding the tax credit deals with
ownership, as "the beginning farmer cannot be a shareholder, partner or LLC
member of the Lessor," the law reads. Even so, it's likely that family operations
will comprise the majority of arrangements garnering the tax credit.
"The family element is one aspect of it that's going to lead to heavier adoption in
Iowa," McEowen says.
The Iowa Agricultural Development Authority will remain the administrator of the
Iowa Beginning Farmer Tax Credit. It will require some financial documentation
from those utilizing the tax credit. Both financial statements and proof of
adequate working capital must be submitted to IADA at least once annually. In
addition, the beginning farmer must submit his or her IRS Form 1040 Schedule F
to IADA by the tax filing deadline every April.