As you probably already know, the Senate approved the Farm, Nutrition, and Bioenergy Bill of 2007 (H.R. 2419) on December 14. The House, however, did not move on the Senate version of the farm bill before its holiday recess. The House and Senate will have to reconcile their bills in conference in 2008. They reportedly are close to an agreement.
H.R. 2419 includes many farm-specific tax incentives. The highlights are:
- Giving participants in the conservation reserve program (CRP) the option to choose between a regular cash payment and a tax credit equal to the cash payment;
- Excluding CRP tax credits from income and self-employment tax;
- Permanently extending the Pension Protection Act’s conservation easement tax incentives;
- Reducing the recovery period from seven to five years for certain farm machinery and equipment;
- Creating a new 30 percent personal credit for residential wind property (capped at $400 per year);
- Creating or extending some producer credits for biodiesel and other alternative fuels; and
- Creating a new energy efficient motors tax credit as part of the general business credit.
Economic substance. The farm bill, as amended by the House for PAYGO offsets, would codify the economic substance doctrine, which the courts and the IRS have used to shut down tax shelters and other abusive transactions, to offset some of its tax incentives.
Under the bill, economic substance would be satisfied only if: (1) The transaction changes in a meaningful way (apart from federal income tax consequences) the taxpayer’s economic position; and (2) The taxpayer has a substantial non-federal tax purpose for entering into such transaction. This offset is one of the more contentious provisions to be resolved in conference committee negotiations next year.
457 plans. Another proposed offset would allow governmental 457 plans to add a Roth contribution program to the plan. Prior legislation allowed 401(k)s to add a Roth provision.
CCH Tax Briefing – December 20, 2007
