Order Code RS22851
April 1, 2008
The Conservation Reserve Program: Legal
Analysis of Proposed Legislation to Change
the Structure and Taxation of Benefits
Received
Carol A. Pettit
Legislative Attorney
American Law Division
Summary
The Internal Revenue Service considers payments received under the Conservation
Reserve Program (CRP) self-employment income even though they are called “annual
rental payments,” and rental income from real property is generally excluded from self-
employment income. Bills have been repeatedly introduced before Congress to
statutorily exclude the CRP payments from self-employment tax, but these bills
generally have died in committee. In the 110th Congress, the Senate passed H.R. 2419,
which contains a provision that would exclude the payments from self-employment
income in some, but not all, cases. Unlike most previously introduced legislation, it
would also provide a tax credit as an optional alternative to the current annual rental
payments. This credit would be subject to neither income tax nor self-employment tax.
Background
The Conservation Reserve Program began in 1985 as a program designed to remove
highly erodible croplands from current crop production. It was established by the Food
Security Act of 19851 and has been expanded and extended by subsequent legislation.2
The program provides for “annual rental payments” to land owners or operators who
agree to enroll their qualifying land in the program. Enrollment requires them to remove
land from production and, generally, refrain from using the land commercially. They
must also follow an approved conservation plan. In return, they receive annual payments.
These payments are referred to as “rent” in the statute, regulations, and contracts.
However, from the beginning, the Internal Revenue Service (IRS) has treated this income
1 P.L. 99-198, 99 Stat. 1354.
2 See CRS Report RS21613, Conservation Reserve Program: Status and Current Issues, by
Tadlock Cowan for general background of the CRP and procedures for enrolling land in the
program.

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as self-employment income for those who continued to farm other land connected to the
CRP land. Although the IRS initially treated the payments as rental income for those not
otherwise engaged in farming, and, therefore, not subject to self-employment tax, that
treatment has changed over the years. In 2006, the IRS issued a proposed revenue ruling
that would treat virtually all CRP annual payments as self-employment income.3
Net self-employment income is subject to a 15.3% self-employment tax. Since CRP
annual payments are also subject to income tax, the total tax an individual must pay on
CRP payments is generally between about 25%4 and 56%5 of the total received if the CRP
payments are subject to self-employment tax.6
Congressional Response
Several bills have been introduced in recent Congresses to completely exclude CRP
payments from self-employment income.7 Most were simply referred to committee, and
no hearings were held.8
During the first session of the 110th Congress, two similar bills were introduced.9
Again, they were referred to committee. However, in S. 2242, the Heartland, Habitat,
Harvest, and Horticulture Act of 2007, the issue was approached in a different manner.
This approach has been adopted in H.R. 2419 — the “Farm Bill.”10
Rather than exempting all CRP payments from self-employment tax, while still
including them for income tax, the Farm Bill provides two alternatives that would provide
some relief to taxpayers. The first offers an optional tax credit in lieu of CRP payments.
The second explicitly exempts CRP payments from self-employment tax for certain
3 I.R.S. Notice 2006-108, 2006-51 I.R.B. 1118.
4 This assumes no expenses to offset the CRP income, a federal marginal tax rate of 10% for the
entire amount, and no state tax.
5 This assumes no expenses to offset the CRP income, a federal marginal tax rate of 35% for the
entire amount, and a state marginal tax of 6%.
6 Some individuals would have an effective tax rate that was lower; for others it could be higher.
Expenses to offset income would lower the taxes paid. Other income would affect the extent to
which the income was taxed at the marginal rate. “Phase-outs” of itemized deductions and
exemption amounts can result in more tax being paid because more is subject to higher marginal
rates.
7 See e.g., H.R. 4073, H.R. 5169, S. 665, S. 1316 (108th Congress); H.R. 923, H.R. 2347, S. 312,
S. 315 (107th Congress); H.R. 4064, S. 2344, H.R. 4212, S. 2422 (106th Congress). These were
introduced after a Sixth Circuit Court case reversed the Tax Court’s holding that CRP payments
were rent that was excludible from self-employment income. Wuebker v. Comm’r, 205 F.3d 897
(2000), rev’g 110 T.C. 431 (1998).
8 Hearings were held on S. 312 and S. 315 (both 107th Congress).
9 H.R. 2659, S. 1155.
10 H.R. 2419 (Engrossed Amendment Agreed to by Senate). All references to “the Farm Bill,”
H.R. 2419,” or “the current proposal” are to the Senate-passed version of H.R. 2419.

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taxpayers. CRP annual payments would remain subject to income tax for all recipients.
The credit would be subject to neither income nor self-employment taxes.
Tax Credit. As proposed in the Farm Bill, participants in the CRP could elect to
receive an annual tax credit 11 rather than receiving the annual rental payments.12 This
credit would be subject to neither income nor self-employment tax.13 Those who did not
elect to receive the credit would continue to receive the annual rental payments.
The amount of the credit would be the same as the amount of the annual rental
payment each electing participant would otherwise have received.14 The credit could be
used to offset current year’s taxes, but would not be refundable.15 However, any excess
could be carried forward and used against tax in future years.16 The credit would not be
allowed as either an original credit or as a carryforward in any fiscal year after FY2012.17
Early termination of a CRP contract generally involves repayment of all payments
received from the program since the beginning of the contract.18 The proposed credit
would be treated differently — it would be recaptured only on a prorated basis for the
fiscal year in which the contract was terminated and the credit allowed.19
Exclusion from Self-Employment Income for Certain Taxpayers. The
Farm Bill would exclude CRP payments from self-employment income for those
receiving regular retirement benefits from Social Security as well as those receiving
Social Security disability benefits.20 It is silent as to the treatment of CRP payments
received by all others. Given the current position of the IRS, it seems likely that this
silence would result in these payments being considered self-employment income for all
others.21 The committee report for the Heartland, Habitat, Harvest, and Horticulture Act
11 H.R. 2419 § 12201(a) (adding 26 U.S.C. § 30D(a)).
12 H.R. 2419 § 12201(b)(1) (adding 16 U.S.C. § 3834(c)(6)).
13 H.R. 2419 § 12201(a) (adding 26 U.S.C. § 30D(e)(4)).
14 H.R. 2419 § 12201(a) (adding 26 U.S.C. § 30D(a)).
15 H.R. 2419 § 12201(a) (adding 26 U.S.C. § 30D(b)(1)).
16 H.R. 2419 § 12201(a) (adding 26 U.S.C. § 30D(d)).
17 H.R. 2419 § 12201(a) (adding 6 U.S.C. § 30D(c)(1), (3)).
18 16 U.S.C. § 3832(a)(5)-(6). See CRS Report RS21613, Conservation Reserve Program: Status
and Current Issues.
19 H.R. 2419 § 12201(a) (adding 26 U.S.C. § 30D(e)(3)).
20 H.R. 2419 § 12202(a) (amending 26 U.S.C. § 1402(a)(1); § 12202(b) (amending § 211(a)(1)
of the Social Security Act).
21 Some, however, argue that CRP payments can be excluded from self-employment tax on
current tax returns. George F. Patrick, Income Tax Management for Farmers in 2007 at 24-25,
C E S -3 6 4 -W , P U R DUE EXTE N S I O N P U R D U E U . ( 2 0 0 7 ) . A va i l a b l e a t
[http://www.agecon.purdue.edu/extension/pubs/TAXPLAN2007final.pdf].

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of 2007, in addressing that act’s identical provision, stated, “The treatment of
conservation reserve program payments received by other entities is not changed.”22
Analysis of the Tax-Related CRP Proposals in the Farm Bill
Tax Credit. A tax credit reduces taxes dollar-for-dollar. Most tax credits are not
refundable and no current tax credit is subject to federal income tax or self-employment
tax.23 In this regard, the proposed credit is no different. It is different than most credits,
however, because it can be carried forward to a subsequent tax year if not used in full in
the current one.24
Those opposing the proposed credit may argue that it is regressive in nature in that
it will provide the most benefit to those whose income is highest. This benefit could
occur in two different ways. Since the credit would not be subject to either income or
self-employment taxes, those in the higher tax brackets would receive a greater tax benefit
from nontaxability than would those in lower tax brackets.25 Additionally, those with
higher income would be more likely to have tax liabilities that equal or exceed the credit
amount.26 Because of the time value of money, those who are able to fully use the credit
will receive a greater value from the credit than those who must carry part of the credit
forward to a subsequent year.
Those in favor of the credit may point out that no one is forced to take the credit and
no one is prevented from doing so. This allows all parties to examine their own situations
and determine whether the credit is more beneficial to them than is the direct annual
payment. Arguably, even those who cannot use the credit in full in the first year may still
derive more net benefit from the credit than they would from the direct payment since
they would have to pay income tax on that direct payment and in many cases would also
have to pay self-employment tax. Thus, even those in the 10% marginal tax bracket could
realize greater benefit from the credit than direct payment if they were able to use at least
75% of the credit in the initial year.27
22 S.Rept. 110-206, at 9(2007).
23 Credits may be indirectly subject to some states’ income taxes. In some states, federal tax
liability (after credits) has been allowed as a deduction on the state income tax return and, thus,
lowering net federal income tax would increase state taxable income.
24 At least one other credit, the foreign tax credit, can also be carried forward if not allowed in
full in the current year.
25 If the CRP payments are subject to income tax, someone whose marginal tax rate is 35% would
only net 65% of the CRP payments (after federal income tax but before either self-employment
or state income taxes). On the other hand, an individual whose marginal rate is 10% would net
90% of the CRP payments after federal income tax. The first person’s benefit from non-
taxability would be 35% of the CRP payments, whereas the second’s benefit would be only 10%.
26 A taxpayer’s CRP tax credit could be as high as $50,000. H.R. 2419 § 12201 (adding 26
U.S.C. § 30D(c)(2)(B)).
27 This assumes that the CRP annual payment would be subject to both federal income and self-
employment taxes, but not state taxes.

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Other arguments in favor of the credit may come from those who believe that the
IRS’s treatment of CRP payments as self-employment income is wrong or has been
expanded too far. They may also argue that the credit provides an incentive needed to
encourage enrollment in the CRP. The committee report indicates that the reason for the
change in the law is to provide additional incentives “to encourage eligible producers to
establish long-term, resource conserving covers on eligible farmland.”28 On the other
hand, the effect on the credit if a contract is terminated early is rather mild when
compared to the total repayment requirement for regular CRP payments; so it is arguable
that the credit might encourage people to enroll, but might not encourage them to remain
enrolled long term.
Some may argue that there is no need for further incentives since there has been a
competitive bidding process under which applicants have tried to assure acceptance of
their bids by offering their land in return for annual payments below the allowed rental
values.29 However, rising commodity prices may reduce interest in participating in the
CRP.30
Exclusion from Self-Employment Tax for Certain Individuals. Unlike
earlier proposed legislation that would have excluded all CRP payments from self-
employment income, the Farm Bill would exclude only those payments received by
retirees and the disabled. Even these would be limited to those individuals who were
receiving benefits from either regular retirement31 or disability32 under the Social Security
Act.33 Both regular retirement benefits and disability benefits received from Social
Security have links to other “earned income”34 received. In the case of regular retirement
benefits received prior to reaching “full retirement” age, the benefits are reduced by $1
for every $2 by which the recipient’s earned income exceeds a statutory annual limit.35
28 S.Rept. 110-206, at 8.
29 See CRS Report RS21613, Conservation Reserve Program: Status and Current Issues.
30 Id. See also Otto Doering, Overview of the 2007 USDA Farm Bill: A Perspective on the Past
& Future of the Conservation Reserve Program, EC-747-W, PURDUE EXTENSION PURDUE U.
Available at [http://www.ces.purdue.edu/extmedia/EC/EC_747_W_Conservation_Reserve_
Program.pdf].
31 These benefits are received under § 202 of the Social Security Act (42 U.S.C. § 402).
32 These benefits are received under § 223 of the Social Security Act (42 U.S.C. § 423).
33 The proposed bill would not exclude CRP payments from self-employment income for other
retirees — such as military, civil service, and state retirees — or those receiving disability
benefits from Veterans Affairs or some other source unless they were concurrently receiving
either Social Security retirement benefits or SSI benefits.
34 “Earned income” is income such as wages and net self-employment income. “Unearned
income” is other income: interest, dividends, rents, royalties, pensions, etc. Unearned income
has no effect on the amount received as regular Social Security retirement benefits, though it can
affect the degree to which such benefits are subject to income tax.
35 For 2008, that limit is $13,560. How Work Affects Your Benefits, SSA Pub. No. 05-10069 (Jan.
2008). Available at [http://www.ssa.gov/pubs/10069.html#howmuch].

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Receipt of disability benefits from Social Security is predicated on a disability that
prevents the recipient from any work that would result in earned income.36
If CRP payments were excluded from the definition of income subject to self-
employment tax for those receiving regular Social Security retirement benefits, some
might argue that many recipients would receive a double benefit: they would not be
required to pay self-employment tax on the income, and the income would not reduce
their benefits. A further argument might be made that those receiving Social Security
disability benefits would also be receiving a double benefit: they would not be required
to pay self-employment tax on the income and the income could not be considered
evidence of an ability to engage in substantial gainful activity. In each case, Social
Security beneficiaries would be exempt from funding the program under which they
receive benefits.
Others may argue that excluding CRP payments from self-employment income for
Social Security beneficiaries complies with the rationale behind the IRS’s position in an
early private letter ruling37 — those who are retired are not in the trade or business of
farming simply by virtue of having land enrolled in the CRP. The committee report sheds
no light on the considerations behind this provision in the Farm Bill. It says only that
“[t]he Committee believes that the correct measurement of income for [self-employment
tax] purposes in the cases of retired or disabled individuals does not include conservation
reserve program payments.”38 The report does not explain why the payments are
specifically excluded only for retirees and the disabled, nor does it explain why they are
specifically excluded only for those receiving benefits from Social Security.
Conclusion
For FY2008 through FY2012, this provision, if enacted, would assure CRP
participants of a choice in the taxation of their CRP benefits. They could choose the
nonrefundable credit and shield their benefits from both income and self-employment tax,
but potentially postpone or even eliminate39 some of the benefit if their tax liability does
not equal or exceed their credit. They could choose to receive full payment benefits each
year, pay income and self-employment tax on those benefits, and possibly generate future
Social Security benefits. The bill does not, however, assure participants a similar choice
beyond 2012, nor does it clarify whether CRP annual payments generally should be
treated as self-employment income — an issue that has not yet been addressed by
Congress.
36 See 42 U.S.C. § 423(d).
37 P.L.R. 88-22-064 (Mar. 7, 1988) (“[Y]ou are retired from farming. Accordingly, the payments
you receive pursuant to your participation in the CRP are not includible in computing ‘net
earnings from self-employment.’”).
38 S.Rept. 110-206, at 9.
39 Since credits cannot be carried forward beyond FY2012, some credit amount could be
permanently lost.

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