Tax Implications of Farm Debt Cancellation under the Inflation Reduction Act

The Inflation Reduction Act (IRA) includes a provision, Section 22006, which aims to improve the financial difficulties experienced by individuals in the agricultural sector. This initiative has a significant budget of $3.1 billion, and it has already provided around $1 billion in support.  

This provision mandates the USDA to expedite aid to distressed borrowers holding direct or guaranteed loans managed by the USDA’s Farm Service Agency (FSA). This is particularly aimed at farmers whose operations are facing financial instability. The program notably includes support for borrowers who have been 60 days delinquent due to unforeseen challenges such as natural disasters, the pandemic or other unexpected situations. The assistance provided is a two-fold process: delinquent accounts are brought up-to-date and their subsequent installments are covered, providing essential breathing space for those affected. 

The functioning of Section 22006 is straightforward: when a farmer becomes delinquent on a loan, this program offers payment assistance. Unlike standard aid initiatives, which involve applications and eligibility criteria, this unique clause provides a simplified, user-friendly mechanism of aid.  

Tax Implications 

The IRA does not stipulate that these loan payments be exempted from taxation. However, through dialogues involving the USDA, the IRS and the Department of Treasury, these payments have been re-characterized as cancellation of debt (COD), permitting, in some instances, the exclusion of these payments from income under IRC section 108. These conditions are: 

  • The loan was incurred directly in the operation of the farm. The borrowed funds must have been used in the farm operations for it to be eligible for this exclusion. 
  • More than half of the taxpayer’s income from the prior three years was from farming. The individual claiming the exclusion must demonstrate that more than 50% of their income from the previous three years was derived from the farming business. 
  • A qualified person canceled the loan. A qualified person includes a federal agency or any organization that has lent money under a program of the federal or state government designed to encourage family farms. 

If the conditions are met, this can result in substantial tax savings. The tax rules concerning cancellation of farm debts are complex and it’s important to consult with a farm tax accountant to fully understand how these rules apply to your situation. 

We will keep you informed as more details about this federal relief program become known. In the meantime, feel free to contact an Adams Brown advisor.