The Internal Revenue Service (IRS) and the Treasury Department have clarified the U.S. Department of Agriculture’s (USDA) Discrimination Financial Assistance Program, addressing critical questions about tax implications for self-employed individuals and small business owners.
The program, established as part of the Inflation Reduction Act of 2022, aims to aid farmers, ranchers, and forest landowners who have faced discrimination by the USDA in farm lending before 2021. Eligible participants include those who have experienced discrimination in USDA farm lending or have assumed farm lending debt affected by discrimination.
The program covers a range of discriminatory factors, including race, color, national origin/ethnicity, sex, sexual orientation, gender identity, religion, age, marital status, disability, or reprisal for prior civil rights activity.
One significant aspect addressed by the IRS and Treasury is whether financial assistance payments from the program are taxable. According to their guidance, these payments are indeed includible in gross income for federal income tax purposes.
Moreover, individuals who hired attorneys to assist with their program applications may deduct the fees paid to these attorneys. The deduction is limited to the amount received from the program and can be claimed as an adjustment to income on Schedule 1 (Form 1040), line 24h.
Regarding self-employment tax implications, the IRS explains that whether financial assistance payments are subject to self-employment taxes depends on the individual’s specific circumstances. Generally, a nexus between the payment and a trade or business activity is necessary for self-employment tax purposes. If the payment is linked to the individual’s conduct of a trade or business, including compensation for lost income, it is typically considered self-employment income.
This clarification is particularly relevant for self-employed individuals and small business owners who operate their farms. The IRS underscores that ongoing efforts to further the interests of the business are crucial for determining self-employment status.
In summary, the IRS and Treasury’s guidance sheds light on the tax implications of the USDA Discrimination Financial Assistance Program for self-employed individuals and small business owners. It clarifies includibility in gross income, deductibility of attorney fees, and potential self-employment tax obligations, offering valuable insights for those navigating the program.
Source ( Accounting Today News).
