Congressman Aaron Schock, a member of the Ways and Means committee, the chief tax-writing committee in the House, introduced legislation today that ensures farmers in Illinois and around the country are treated with equal fairness by the Internal Revenue Service (IRS). The Farm Tax Parity Act, would amend the IRS code of 1986 to exclude farm rental income from self-employment taxes, making the tax treatment equitable to any other business in which an owner of property rents such property to their small business.
Currently, a farmer who rents land out to their own farming corporation has to pay employment taxes on the rent they receive. This is different from any other industry in which rental income is treated as investment income and is not subject to self employment taxes. For example, a self-employed dentist who owns the building where his practice rents office space doesn't have to pay the self-employment tax on the rental income the dentist receives as the landlord.
The discrepancy in the tax code continues to place farmers in financial jeopardy, and has positioned them squarely in the sights of the IRS who have aggressively come after farmers who rent out their land in states like Illinois, while the IRS operates under a different set of rules in states that border Illinois like Missouri and Iowa.
"I have heard from a number of my local farmers and farm bureaus that they are being aggressively and unfairly targeted by IRS audits on rental income," said Congressman Aaron Schock. "The IRS operates in an inconsistent way in different parts of the country which unfairly penalizes farmers in Illinois, but right across the Mississippi River in Missouri the IRS is operating under a completely different set of rules. All farmers in the U.S. deserve to be treated the same way and should not be discriminated against due to the location of their farm. The same rules should apply to everyone."
"Illinois Farm Bureau appreciates Rep. Schock's efforts to restore fairness across agriculture on IRS treatment of farm rental income for tax purposes," said Illinois Farm Bureau President Philip Nelson."It makes absolutely no sense to us that there are different federal tax laws for farmers who happen to live on different sides of the same river."
"We greatly appreciate Congressman Schock's efforts to correct a deficiency in the tax code," said David Gay, President of the Pike County Farm Bureau in Pittsfield, Illinois. "It never made sense that a farmer should have had to pay self-employment tax on rents paid to that family farm corporation. We hope this corrects the problem facing farmers throughout the United States."
The Eighth Circuit Court, which includes bordering states Iowa and Missouri, have established that rental payments for farm land made to active farmers should be excluded from self-employment tax if there is no requirement in the production arrangements (lease) for the land owner to participate and the rent paid was consistent with the fair rental value of the leased properly. The Court determined that the rental agreement should be treated as separate and distinct from the employment agreements in determining whether an arrangement existing calling for material participation. However, since the ruling was not made in a tax court, the beneficiaries only remain for those states which reside within the Eight Circuit.
Following the Eighth Circuit Court's determination, the IRS disagreed with the decision and issued a Notice of Nonacquienscense. The IRS has decided to only comply with the Courts decision within the 8th circuit stating that, "The Service does not acquiesce to the Eighth Circuit's decision and will continue to litigate its position in cases in other circuits."