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Iowa program targets landowners, beginning farmers

Beginning January 1, 2007, established Iowa farmers will have more incentive to help beginning farmers enter the crop production industry.

On that date, the Iowa Beginning Farmer Tax Credit will go into effect. Initiated around six years ago by the Iowa State University Beginning Farmer Center and approved during the 2006 Iowa legislative session, the program, administered by the Iowa Agricultural Development Authority (IADA), will provide a tax credit ranging from five to 15% to any eligible taxpayer who transfers assets to a "beginning" farmer.

A highlight of the Iowa program is the absence of an age caveat. This was done so with purpose, according to IADA executive director Jeff Ward, because of the growing number of older beginning farmers.

"We are continuing to see the average age of a beginning farmer increase. We're seeing more farmers in their 30s and 40s, who have been out working for a few years, now coming back to farm," Ward says. "Overall, the program is designed to provide an incentive to Iowa's agricultural asset owners to lease those assets to Iowa's aspiring beginning farmers regardless of age or tenure."

The tax credit program, sponsored in the Iowa Legislature by Representatives Dwayne Alons and Jack Drake, is also a step to invigorate farmer numbers in the state where a growing majority of landowners are either at or beyond retirement age or own land on an absentee basis.

"More and more of the agricultural land is owned by farmers over 55 and 60 years old, and the number of those 35 and under is dwindling. Twenty percent of the land is owned by someone out of state and cash-rented," says Iowa State University agricultural law professor Roger McEowen. "This tax credit is kind of a way for beginning farmers to get a foothold in agriculture."

Oversight of this program, according to Ward, is similar to the Iowa Beginning Farmer Loan Program that's been in place since 1981 and has helped around 3,500 beginning farmers enter agriculture. With the tax credit, asset transfers between two and five years can net the landowner credits between five percent for cash rental agreements up to 15% for crop- or livestock-share agreements.

"The 15% level for share agreements was intentional by the legislature to encourage agriculture asset owners to lease their assets utilizing this method. There's an extra incentive for doing it on a risk-share or crop-share basis. That was intentional," Ward says. "It is obviously less risky for the beginning farmer and requires less up front capital to get started."

One similar tax credit program in Nebraska currently has a "related party" rule, essentially barring family members from taking advantage of tax credits for farm asset transfers. Nebraska officials are "taking steps to remove this restriction," in response to the recognition of it as a deterrent to some potential farm asset transfers.

"We were aware of Nebraska's concerns with the related party rule during the development of this legislation and in turn the legislation took steps to allow such transactions, with obvious due diligence," Ward says.

The omission of a related party rule in the Iowa tax credit is also intentional. "It's how a lot of young farmers get started. This is just to give incentive for father to turn it over to the son -- even if it's 80 out of 1,000 acres -- just to get started," Ward says.

There are measures built in to the Iowa tax credit program to prevent fraudulent asset transfers.

"Between the administrative rules and the working program rules, there's third-party verification that's going to have to go on with the related party transactions so that dad's not just doing it on paper to get the tax credit," Ward says. "Each application will have to pass a reality test. In other words, each application will be asked the question: 'Is this real?' If an application can't definitively answer that question 'Yes,' it will be subject to additional due diligence by the authority staff or denial of a tax credit by the IADA board of directors."

The Iowa Agricultural Development Authority will remain the administrator of the Iowa Beginning Farmer Tax Credit. It will require some financial documentation from those utilizing the tax credit. Both financial statements and proof of adequate working capital must be submitted to IADA during the initial application process. In addition, the beginning farmer must submit his or her IRS Form 1040 Schedule F to IADA by the tax filing deadline every April.

Beginning January 1, 2007, established Iowa farmers will have more incentive to help beginning farmers enter the crop production industry.

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