Are USDA Grants Taxable? Exclusions, Reporting, and Penalties

USDA grants are taxable in most cases. Federal tax law treats grant payments to farmers and ranchers as ordinary income unless a specific statute lets you leave them out, and the default reporting home is Schedule F. A narrow set of conservation cost-share payments can be excluded under Section 126, certain disaster payments qualify under Section 139, and forgiven farm debt may escape tax under Section 108. Everything else lands on your return as income for the year you received 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 goes on Schedule F.²

USDA payments generally fall into a few categories: income replacement, capital grants, cost-share reimbursements, conservation rental payments, disaster relief, and debt forgiveness. Each follows its own rules.

Income Replacement and Subsidy 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 fall in this bucket. Report them on Schedule F, Line 4a.²

Because these payments are farm income, they also trigger self-employment tax. For 2026, the combined self-employment rate is 15.3%: 12.4% for Social Security on net earnings up to $184,500, and 2.9% for Medicare on all net earnings.³ You can deduct half of the SE tax on Schedule 1.

Grants for Equipment and Capital Improvements

A grant earmarked for buying equipment or constructing a building is taxable in the year you receive it. You include the grant in gross income on Schedule F. Those dollars then become part of the asset’s cost basis, so you recover them through depreciation, Section 179, or bonus depreciation.

Say you receive a $50,000 grant and buy a tractor with it. You report $50,000 in income, then claim depreciation on the $50,000 basis. The income and the depreciation deduction don’t always land in the same year, so the timing mismatch can produce a tax bill up front even though the long-term effect is closer to neutral.

If a conservation grant is excluded from income under Section 126, that excluded amount never enters the asset’s basis.⁴ You cannot both exclude the income and depreciate the same dollars.

Cost-Share Reimbursements

Many USDA programs reimburse a share of specific expenses, like fencing, cover crop seed, or nutrient management practices. When the reimbursement and the expense hit the same tax year, they tend to wash: the payment goes on Schedule F as income, the expense comes off as an ordinary and necessary business deduction, and the net effect on taxable income is often zero.⁵

The wrinkle is timing. If you deduct the expense in Year 1 and receive the reimbursement in Year 2, the tax benefit rule pulls that reimbursement back into income in Year 2 to the extent the earlier deduction reduced your tax.⁶ Track which expenses correspond to which reimbursements.

The Section 126 Exclusion for Conservation Payments

The most valuable exception to the default is the income exclusion for conservation cost-share payments under Section 126 of the Internal Revenue Code. If your payment qualifies, you can leave some or all of it out of gross income.⁴

Which Programs Qualify

Section 126 lists specific federal programs by name, including the water bank program, the rural clean water program, emergency conservation measures, and the agricultural conservation program.⁴ It also covers small watershed programs administered by the Secretary of Agriculture that Treasury determines are substantially similar to the listed programs. The IRS ruled in Revenue Ruling 97-55 that certain EQIP cost-share payments for small watersheds qualify, though not all EQIP payments do. State and local conservation programs can qualify if they primarily serve conservation, environmental protection, or wildlife habitat purposes.

Eligibility runs at the program level, not the payment level. If the program you were paid under isn’t listed or hasn’t been certified as substantially similar, the exclusion doesn’t apply regardless of how conservation-oriented the work feels.

How Much You Can Exclude

The excludable portion is capped. The IRS limits the exclusion to the present fair market value of the right to receive annual income that doesn’t substantially increase your income from the affected property. Substantial means the greater of 10% of your average gross receipts from the affected land over the three years before the improvement, or $2.50 per affected acre.⁷ Any payment portion above that ceiling gets included in income like any other grant.

Electing In and Out

The exclusion is automatic when you qualify. You don’t file anything to claim it. The election runs the other way: if you’d rather include the full payment in income so you can take the related depreciation and deductions, you can elect out by the due date of your return, including extensions. Report the total payment on Schedule F, Line 4a, and the taxable portion on Line 4b. The difference is your excluded amount.⁸

You cannot exclude the payment and also depreciate the improvement it paid for. Sometimes opting out and taking full depreciation produces a better result, especially where 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.⁹

CRP rental payments are also subject to self-employment tax, with one exception: if you’re receiving Social Security retirement or disability benefits, the payments are not included in net self-employment income.⁹ Despite what some assume, CRP payments do not go on Schedule E. They stay on Schedule F.

CRP payments for the permanent retirement of cropland base and allotment history are not self-employment income at all. The IRS treats them as the sale of a capital asset.⁹

Disaster Relief Payments

Disaster payments split by what they replace. USDA disaster payments that replace lost crop revenue are fully taxable. Payments that qualify as “qualified disaster relief” under Section 139 can be excluded from gross income entirely.¹⁰

To qualify under Section 139, the payment must connect to a federally declared disaster or similar qualifying event and 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.¹⁰

A disaster payment that replaces crop income you would have earned is taxable. A payment helping you rebuild damaged personal property or covering personal living expenses during recovery can be excluded. Both may come from USDA programs in the same disaster year, so read your payment documentation carefully.

Farm Debt Forgiveness

When USDA or another lender cancels a farm loan, the forgiven amount is generally taxable. Section 108 provides a specific exclusion for “qualified farm indebtedness” that can keep the forgiven balance out of income.¹¹

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 and most commercial lenders actively and regularly engaged in lending.

The qualified farm indebtedness exclusion does not apply if you are insolvent at discharge, because the separate insolvency exclusion under Section 108 already covers that scenario.¹¹ If USDA forgave loan balances, you should have received a Form 1099-C reporting the cancelled amount.¹²

Reporting USDA Payments on Your Return

USDA reports payments on Form 1099-G (Certain Government Payments) or Form CCC-1099-G, typically issued by January 31 of the following year.¹³ The form shows the total 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 obligation. You still apply the rules above to determine what’s actually includable.

On Schedule F, program payments go on Line 4a (total received) and Line 4b (taxable amount).⁸ When you claim a Section 126 exclusion, the difference between those two lines is the excluded amount. For disaster payments, the Schedule F instructions direct you to Line 6a.² If you used grant money to buy a depreciable asset, report the full grant as income first, then calculate depreciation separately on Form 4562.

Fixing an Incorrect 1099-G

If the amount reported on your 1099-G doesn’t match what you received, contact your local FSA county office to request a review. If the office confirms the error, it submits a correction request and a corrected CCC-1099-G is issued.

Don’t ignore a mismatch. The IRS matches 1099 forms to your return automatically, and a discrepancy typically produces a CP2000 notice proposing additional tax. Respond by the date on the notice with documentation showing the correct amount.¹⁴ If you agree with the CP2000 but have other changes to report, file an amended return using Form 1040-X.

Penalties for Underreporting

Failing to report USDA grant income can trigger the 20% accuracy-related penalty on the underpaid tax. The IRS specifically flags situations where income shown on a 1099-G doesn’t appear on your return, treating that pattern as negligence.¹⁵

The same 20% penalty applies if the understatement is “substantial,” defined for individuals as the greater of 10% of the tax that should have been shown or $5,000. If you claim the qualified business income deduction under Section 199A, the threshold drops to 5% of the required tax or $5,000.¹⁵

Interest 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 quarter, compounded daily.¹⁶ Interest applies to both the unpaid tax and any penalties, and runs until the balance is paid. A grant you thought was tax-free can get expensive if the IRS disagrees with your position and you haven’t documented the basis for an exclusion.

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