IRS offers guidance on tax questions related to USDA discrimination program

The Internal Revenue Service and he Treasury Department issued answers to frequently asked questions Friday pertaining to the U.S. Department of Agriculture’s Discrimination Financial Assistance Program, which offers help to farmers, ranchers, and forest landowners who experienced discrimination by the USDA in farm lending prior to 2021.

The program was part of the Inflation Reduction Act of 2022, and as a result, USDA created the USDA Discrimination Financial Assistance Program. To be eligible to participate, people need to have experienced discrimination by USDA in USDA farm lending or be a debtor with assigned or assumed USDA farm lending debt that was the subject of USDA discrimination.

The program covers discrimination based on race, color, or national origin/ethnicity (including status as a member of an Indian Tribe); sex, sexual orientation, or gender identity; religion; age; marital status; disability; or reprisal/retaliation for prior civil rights activity. More information about the program can be found here.

Among the questions and answers provided by the Treasury and the IRS on the FAQ page are whether financial assistance payments from the program are includible in my gross income for federal income tax purposes? (added Feb. 23, 2024). The answer is yes, the payment is includible in gross income under section 61 of the Tax Code.

If a participant in the program hired an attorney to help them apply for financial assistance through the program, another question asks whether they can deduct the fees paid to the attorney? 

The answer there too is yes. “Fees paid to an attorney in connection with any action involving a claim of unlawful discrimination may be deducted ‘above-the-line,’ but the deduction is limited to the amount of any payment you received from the program. You can claim this deduction as an adjustment to income on Schedule 1 (Form 1040), line 24h.”

Another question asks about whether financial assistance payments through the program are subject to self-employment tax.

The answer is it depends on the taxpayer’s particular facts and circumstances. “For self-employment tax purposes, generally there must be a connection (nexus) between the gross income (here, that is the financial assistance payment you received) and a trade or business that is, or was, carried on,” said the guidance. “A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether an activity is a trade or business. You do not need to make a profit to be in a trade or business as long as you have a profit motive, but you do need to make ongoing efforts to further the interests of your business. Generally, the required nexus exists if it is clear you received the financial assistance payment because of your individual conduct of a trade or business, including if you received the payment as compensation for lost income of a trade or business. You are usually self-employed if you operate your own farm on land you either own or rent.”