Farm Progress

Custom farming tax credit will expire in 2018, while tax credits for other parts of BFTC program will decrease.

May 5, 2017

5 Min Read
NO VOTE: A bill in the Iowa Legislature, HF 495, which would have extended the current Beginning Farmer Tax Credit program, never made it to the floor for a vote. There will be changes in the program beginning in 2018.

By Kristine Tidgren

As the 2017 Iowa legislative session wound down, a flurry of budget-cutting took place. A program that’s very important to Iowa’s beginning farmers was on the line. When the Legislature adjourned for the year on April 22, the Iowa Beginning Farmer Tax Credit (BFTC) program survived, but it will look different in 2018.

The custom farming portion of BFTC will expire, and the amount of the credits for other parts of BFTC will decrease in 2018.

The Iowa Legislature created the program in 2007 to encourage owners of agricultural assets to lease those assets to beginning farmers. Called the Agricultural Assets Transfer Tax Credit (AATC), this initial credit allowed a retiring farmer, for example, to receive an Iowa tax credit in exchange for leasing farmland to a qualified beginning farmer. In 2013, the Legislature expanded the program to also grant tax credits to those who hire a qualified beginning farmer for custom farm work.

Under the BFTC program, qualified beginning farmers must possess the following requirements:

• Iowa residency
• sufficient education, training or experience in farming
• access to adequate working capital and production items
• material and substantial participation in farming
• net worth not greater than $645,284 as of Jan. 1, 2017 (for 2017 credit)

In 2009, the Iowa Legislature placed a cap of $6 million on the value of credits that could be awarded in Iowa. When it created the Custom Farming Tax Credit (CFTC) in 2013, the Legislature increased this cap to $12 million — $8 million allotted to AATC and $4 million to CFTC. The Iowa Finance Authority is charged with administering the BFTC program, which includes both AATC and CFTC. The final deadline for 2017 AATC applications is Sept. 1, and the final deadline for 2017 CFTC applications is Nov. 1.

Application fees begin at $200. Successful 2017 applicants will receive tax credit certificates for use when their 2017 Iowa income tax returns are filed.

AATC benefits beginning farmers
AATC grants an owner of agricultural assets a tax credit for leasing agricultural land, depreciable machinery or equipment, breeding livestock, or buildings to a qualified beginning farmer. In 2017, the credit is 7% of the value of a cash rent lease or 17% of the value of a crop share lease. Landowners do not receive a credit for any bonus amount earned under a flex lease. The credit is calculated based upon base rent only.

For crop-share leases, 50% of acres are allocated to corn and 50% to soybeans, unless other crop acres are specifically identified in the lease. Crop-share calculations are based upon the county's historical average T-yield data, and the price is the previous year's RMA fall price. Owners who lease assets to a beginning farmer who is a veteran receive an additional 1% credit during the first year of the lease, for a total of 8% for a cash-rent lease and 18% for a crop-share lease.

For example, John leases 300 acres of crop ground from Jim for $200 per acre in 2017. Assuming John is a qualified beginning farmer who is a veteran, Jim should qualify for a $4,800 Iowa tax credit if the BFTC program application is approved ($60,000 cash rent income × 0.08 credit).

To qualify for AATC, the parties’ lease must be in writing and two to five years in length. No taxpayer can receive more than $50,000 in beginning farmer tax credits per year. Parents can qualify for the credit by leasing their agricultural assets to their children who are qualified beginning farmers. If the amount of the tax credit is greater than the taxpayer’s Iowa tax liability, the credit may be carried forward for up to 10 years. It is not refundable.

The 2017 Iowa Legislature did not extend the current beginning farmer tax credit provisions, and the 2018 AATC will return to 5% of the value of a cash-rent lease and 15% of the value of a crop-share lease. There will be no enhanced credit for leases to a veteran. Furthermore, the cap for available AATCs will reset to $6 million per year.

Custom farming credit will expire
In 2017, taxpayers who hire a qualified beginning farmer to complete agricultural contract work for the production of crops or livestock in Iowa may qualify for a tax credit equal to 7% of the custom contract amount. This amount increases to 8% if the beginning farmer is a veteran. To qualify for the credit, custom farming contracts must be in writing, and they are limited to a period of 24 months or less. The beginning farmer must provide all labor and required machinery. Unlike AATC, parents cannot receive a tax credit for entering into a custom farming contract with their children.

CFTC was set to expire entirely at the end of 2017, unless the Legislature acted to extend it. The Legislature did not extend CFTC. Although AATC will continue with a $6 million cap and lower credit percentages, there will not be a 2018 credit for beginning farmer custom farming contracts.

Impact of the tax credit
A tax credit is more beneficial than a tax deduction, because it is a dollar-for-dollar reduction in tax, as opposed to a mere reduction in taxable income. Taxpayers must have Iowa income tax liability, however, to benefit from the credit.

It should also be noted that nonresident Iowa landowners may not receive a practical benefit from the Iowa credit. When a nonresident earns Iowa income, he or she must pay Iowa income tax. This tax is reduced by any BFTC credit. When that nonresident, however, pays taxes in their home state, that state typically requires the taxpayer to report all income, including that received in Iowa. Many states then give the taxpayer a credit for any taxes paid in Iowa, as opposed to income earned in Iowa. Because an Iowa credit reduces the taxes paid, but not the income earned, the taxpayer may end up paying less tax in Iowa, but more tax in his or her home state because of the credit. Taxpayers considering an application for BFTC should consult with their tax advisers to consider its impact on their individual financial situations.

A bill in the Legislature, HF 495, which would have extended the current BFTC program, made it through the second legislative funnel at the end of March. However, it never made it to the floor of the Legislature for a vote.

Tidgren is staff attorney and assistant director for the Center for Ag Law and Taxation at Iowa State University. Email [email protected].

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