Are USDA Grants Taxable? Section 126, CRP, and Reporting

Are USDA grants taxable? In most cases, yes. Federal tax law treats USDA program payments as ordinary farm income unless a specific provision of the Internal Revenue Code lets you exclude them. The main exceptions are certain conservation cost-share payments under Section 126, qualified disaster relief under Section 139, and qualified farm debt forgiveness under Section 108. Everything else generally goes on Schedule F as taxable income in the year you receive it.

The Default Rule

Gross income includes all income from whatever source, unless a specific provision says otherwise.¹ That puts the burden on you to identify a legal exclusion for any USDA payment you leave off your return. If no exclusion applies, the full amount is taxable as ordinary farm income and gets reported on Schedule F.²

USDA payments generally fall into a handful of categories: income replacement, capital improvement grants, cost-share reimbursements, conservation rental payments, disaster relief, and debt forgiveness. Each follows different rules, and the tax treatment turns on the program that issued the money and what it was meant to cover.

Fully Taxable USDA Payments

Payments that substitute for revenue your farm would have earned through production or sales are almost always fully taxable. The Market Facilitation Program, Agriculture Risk Coverage, and Price Loss Coverage all fit this description. They go on Schedule F, Line 4a.² Because they are farm income, they also trigger self-employment tax. You can deduct half of that self-employment tax on Schedule 1, but the full bite still lands harder than many farmers expect.

Grants earmarked for buying equipment or constructing a building follow the same default. You include the grant in gross income the year you receive it. The offsetting benefit is that those grant dollars become part of the asset’s cost basis, so you can depreciate them over time or, in many cases, deduct the full amount in the first year under Section 179 or bonus depreciation. Say you receive a $50,000 grant and use it to buy a tractor. You report $50,000 as income, then claim depreciation on the $50,000 basis. The income hit and the depreciation deduction won’t always land in the same year, so the timing mismatch can create a tax bill up front.

There’s an important interaction with the conservation exclusion below: if a payment is excluded from income under Section 126, the excluded amount never gets added to the asset’s basis.³ You can’t both exclude the income and depreciate the same dollars.

Cost-Share Reimbursements and Timing

Many USDA programs reimburse you for a share of specific expenses, such as installing fencing, seeding cover crops, or implementing nutrient management practices. When the reimbursement and the qualifying expense fall in the same tax year, they tend to wash. You report the payment as income on Schedule F and deduct the expense on the same return. A $10,000 cost-share paired with a $10,000 qualifying expense produces zero net impact on taxable income, as long as the expense qualifies as an ordinary and necessary business expense.⁴

The wrinkle comes when you deduct an expense in one year and receive the reimbursement the next. If you took a tax benefit from the deduction in Year 1, the reimbursement in Year 2 gets pulled back into income under the tax benefit rule.⁵ Track which expenses correspond to which reimbursements so you aren’t caught off guard the following spring.

The Section 126 Exclusion for Conservation Cost-Share Payments

The most valuable exception to the default rule is the income exclusion for conservation cost-share payments under Section 126 of the Internal Revenue Code. If your payment qualifies, you can exclude some or all of it from gross income.³

Which Programs Qualify

Section 126 lists specific federal programs by name, including the water bank program, rural clean water program, emergency conservation measures, and the agricultural conservation program.³ It also covers any small watershed program administered by the Secretary of Agriculture that Treasury determines is substantially similar. State and local conservation programs can qualify too, if they primarily serve conservation, environmental protection, or wildlife habitat purposes.

Eligibility runs at the program level, not the payment level. If the specific program isn’t listed in Section 126 or hasn’t been certified as substantially similar, the exclusion doesn’t apply no matter how conservation-oriented the work feels on the ground.

How Much You Can Exclude

The excludable portion isn’t automatically the full payment. The IRS caps the exclusion at the present fair market value of the right to receive annual income that doesn’t “substantially increase” your income from the affected property. The test for whether an increase is substantial is the greater of two figures: 10% of your average gross receipts from the affected land over the three years before the improvement, or $2.50 per affected acre.⁶ Any payment portion above that ceiling gets included in income like any other grant. The math here is one place where a tax professional earns the fee.

You Don’t Elect In. You Can Elect Out.

A common misunderstanding: you don’t need to elect into the Section 126 exclusion. It applies automatically when you qualify. The election runs the other direction. If you’d rather include the full payment in income and take the related deductions and depreciation instead, you can elect out by the due date of your return, including extensions. On Schedule F, you report the total payment on Line 4a and the taxable portion on Line 4b. The difference is your excluded amount.⁷

What you cannot do is claim both the exclusion and a deduction for the same expense. If you exclude the payment from income, you don’t get to depreciate the improvement those dollars paid for. Sometimes opting out of the exclusion and taking full depreciation produces a better result, especially when the asset qualifies for accelerated write-offs.

CRP Rental Payments

Conservation Reserve Program annual rental payments do not qualify for the Section 126 exclusion. They compensate you for taking land out of production, which makes them income replacement rather than conservation cost-sharing. They are fully taxable and reported on Schedule F, Line 4a.⁸ Despite what some farmers assume, CRP rental payments do not go on Schedule E as rental income. They stay on Schedule F.

CRP rental payments are also subject to self-employment tax, with one notable exception: if you’re receiving Social Security retirement or disability benefits, those payments are not included in net self-employment income.⁸ That distinction matters for retired farmers who still hold enrolled acres.

One further exception: CRP payments for the permanent retirement of cropland base and allotment history aren’t self-employment income at all, because the IRS treats them as the sale of a capital asset rather than farm operating income.⁸

Disaster Relief Payments

Disaster-related USDA payments split into two categories. Payments that replace lost crop revenue are fully taxable. Payments that qualify as “qualified disaster relief” under Section 139 of the Internal Revenue Code can be excluded from gross income entirely.⁹

To qualify for the Section 139 exclusion, the payment must meet two conditions. It must be connected to a federally declared disaster or a similar qualifying event, and it must reimburse reasonable and necessary expenses, such as personal living costs or repairs to a personal residence, that aren’t already covered by insurance. Government payments made to promote the general welfare in connection with a disaster can also qualify.⁹

The distinction for farmers: a disaster payment that replaces crop income you would have earned is taxable. A disaster payment that helps you rebuild damaged personal property or covers personal living expenses during recovery can be excluded. Both might arrive from USDA programs in the same disaster year, so read the payment documentation carefully.

Farm Debt Forgiveness

When a lender cancels or forgives a farm loan, the forgiven amount is generally taxable, whether the lender is a private bank or the USDA itself. Section 108 of the Internal Revenue Code provides a specific exclusion for “qualified farm indebtedness” that can keep forgiven debt out of income.¹⁰

Three conditions must be met:

The debt was incurred directly in connection with operating your farming business.
At least 50% of your total gross receipts over the three years before the discharge came from farming.
The debt was discharged by a “qualified person,” which includes federal, state, and local government agencies as well as most commercial lenders actively and regularly engaged in lending.

The qualified farm indebtedness exclusion does not apply if you are insolvent at the time of discharge, because a separate insolvency exclusion under Section 108 already covers that scenario.¹⁰ If you received USDA loan forgiveness, you should have received a Form 1099-C reporting the cancelled amount.¹¹ Whether you can exclude that amount depends on your individual circumstances and requires analysis filed with your return.

How to Report USDA Payments

The USDA reports payments to you and to the IRS on Form 1099-G (Certain Government Payments) or Form CCC-1099-G, typically issued by January 31.¹² The form shows the total amount paid during the calendar year. An amount labeled “taxable grants” reflects what the government believes may be taxable, but that number isn’t necessarily your final tax obligation. You still need to apply the rules above to determine what’s actually includable.

On Schedule F, USDA program payments go on Line 4a (total received) and Line 4b (taxable amount).⁷ When you’re claiming a Section 126 exclusion, the difference between those two lines represents the excluded amount. Disaster payments go on Line 6a per the Schedule F instructions.²

If you used grant money to buy a depreciable asset, report the full grant amount as income first, then calculate depreciation separately on Form 4562. The income and the depreciation are independent entries even though they stem from the same dollars.

If Your 1099-G Is Wrong

Errors on government-issued 1099-G forms happen. If the amount reported doesn’t match what you actually received, contact your local FSA county office to request a review. If the office confirms the error, it submits a correction request through USDA’s internal process, and a corrected CCC-1099-G is issued.

Don’t ignore a mismatch. The IRS matches 1099 forms to your return automatically, and if the numbers don’t line up you’ll likely receive a CP2000 notice proposing additional tax.¹³ You have the right to respond with documentation showing the correct amount. Respond by the date listed on the notice.

Penalties for Getting It Wrong

Failing to report USDA grant income can trigger the accuracy-related penalty of 20% on the underpaid tax. The IRS specifically flags situations where income shown on an information return like a 1099-G doesn’t appear on your tax return. That pattern is treated as negligence.¹⁴

The same 20% penalty applies if the understatement qualifies as “substantial,” defined for individuals as the greater of 10% of the tax that should have been shown on the return or $5,000. If you claim the qualified business income deduction under Section 199A, the threshold drops to 5% of the required tax or $5,000.¹⁴

Interest also accrues on unpaid tax from the original due date. For the first half of 2026, the IRS charges 7% in the first quarter and 6% in the second, compounded daily.¹⁵ Interest runs until the balance is paid in full, and it applies to both the unpaid tax and any penalties. A grant you thought was tax-free can get expensive quickly if the IRS disagrees with your position and you haven’t documented the basis for the exclusion you claimed.

1
Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
2
Internal Revenue Service. Instructions for Schedule F (Form 1040)
3
Office of the Law Revision Counsel. 26 USC 126 – Certain Cost-Sharing Payments
4
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
5
Office of the Law Revision Counsel. 26 USC 111 – Recovery of Tax Benefit Items
6
eCFR. 26 CFR 16A.126-1 – Certain Cost-Sharing Payments – In General
7
Internal Revenue Service. Publication 225 – Farmers Tax Guide
8
Internal Revenue Service. Conservation Reserve Program Annual Rental Payments and Self-Employment Tax
9
Office of the Law Revision Counsel. 26 US Code 139 – Disaster Relief Payments
10
Office of the Law Revision Counsel. 26 US Code 108 – Income From Discharge of Indebtedness
11
Farmers.gov. Taxes for Farmers and Ranchers
12
Internal Revenue Service. General Instructions for Certain Information Returns
13
Internal Revenue Service. Understanding Your CP2000 Series Notice
14
Internal Revenue Service. Accuracy-Related Penalty
15
Internal Revenue Service. Quarterly Interest Rates