USDA Conservation Payment Tax Exclusion — When Federal Land and Environment Payments Can Be Excluded from Taxable Income
Legal Authority
- 26 U.S.C. § 126 — Internal Revenue Code provision allowing exclusion from gross income of certain cost-share payments received from government programs for soil and water conservation and similar environmental purposes; lists qualifying programs and conditions
- 5 U.S.C. § 301 — Departmental regulations authority; authorizes USDA to issue implementing rules
- 7 CFR Part 14 — USDA implementing regulations identifying which USDA conservation programs generate payments qualifying for the § 126 income exclusion and establishing the process for USDA to make the required statutory determinations
Key Mechanics
26 U.S.C. § 126 allows farmers and landowners to exclude from gross income certain "excludable payments" received from government conservation programs — payments that would otherwise be taxable as ordinary income. The exclusion applies to cost-share payments (government reimbursements for a portion of conservation practice installation costs) and conservation payments that primarily benefit the environment rather than generate income for the recipient. 7 CFR Part 14 governs USDA's role in the § 126 exclusion: USDA must formally determine that a specific program's payments meet the § 126 criteria before the IRS will recognize the exclusion. Qualifying programs have included EQIP (Environmental Quality Incentives Program), CRP (Conservation Reserve Program), WHIP (Wildlife Habitat Incentive Program), and similar programs under the Farm Bill conservation title. The exclusion does not apply automatically — the landowner must document that the payment was for conservation purposes and that USDA has made the required determination for the specific program. Payments that primarily benefit the taxpayer (rather than serving environmental purposes) or that exceed the cost of conservation practices are not excludable. The exclusion reduces the effective cost of participating in USDA conservation programs by eliminating the federal income tax on cost-share payments.
Current Rule (2026)
| Parameter | Value |
|---|---|
| Citation | 7 CFR Part 14 |
| Issuing agency | USDA (Secretary of Agriculture) |
| Statutory authority | 26 U.S.C. § 126; 5 U.S.C. § 301 |
| Last major amendment | No recent Federal Register amendments |
What This Rule Does
Farmers and landowners who participate in federal conservation, environmental, or wildlife habitat programs often receive government payments — for taking land out of production, restoring wetlands, installing conservation practices, or allowing habitat development. Under the Internal Revenue Code, some of these payments can be excluded from the recipient's gross income and thus not subject to federal income tax. Whether a particular payment qualifies for exclusion depends on a two-part test: (1) the payment must be made primarily for a conservation or environmental purpose, and (2) the Treasury Secretary must determine that the payment does not substantially increase the recipient's income derived from the property.
Seven CFR Part 14 establishes USDA's framework for making the "primary purpose" determination — the first part of that two-part test. The Secretary of Agriculture must evaluate whether each type of payment from covered conservation programs was made primarily to conserve soil and water, protect or restore the environment, improve forests, or provide wildlife habitat. USDA's determination forms the basis for Treasury's final ruling on the income exclusion.
Covered Programs
Part 14 covers payments from specific conservation and environmental programs, including:
- Rural Clean Water Program
- Abandoned Mine Land Reclamation Program (agricultural land reclamation)
- Rural Abandoned Mine Program
- Agriculture Conservation Program payments
- Forestry Incentives Program
- Water Bank Act payments
- Emergency Conservation Program payments (certain types)
- Great Plains Conservation Program
- Resource Conservation and Development Program
- Colorado River Basin Salinity Control Program
State and local government conservation payments may also be eligible if the program meets Part 14's criteria.
Key Provisions
- § 14.1 — Purpose: the Secretary uses these rules to decide the primary reason for payments from covered programs; the primary-purpose finding is one step toward determining whether payments may be excluded from gross income under 26 U.S.C. § 126
- § 14.2 — Eligible programs: only payments from programs specifically listed in Part 14 qualify; payments from programs not on the list are not eligible for the conservation payment exclusion regardless of their conservation purpose
- § 14.3 — Public benefit standard: the Secretary must administer covered programs so the public gets maximum conservation, environmental, forest improvement, and wildlife benefits when the programs are operated
- § 14.4 — Basis for exclusion: the federal income tax on conservation payments should be reduced or eliminated when those payments produce conservation or environmental benefits for the general public that go beyond what the payment recipient personally receives; the exclusion reflects that conservation payments are in part a payment for a public good, not purely income to the landowner
- § 14.5 — Two-part test for exclusion: a payment qualifies for income exclusion if: (1) the money was made primarily to conserve soil and water, protect or restore the environment, improve forests, or provide wildlife habitat; AND (2) the Treasury Secretary finds the payment does not substantially increase the income the recipient derives from the property; both conditions must be satisfied
- § 14.6 — USDA's primary purpose determination: USDA decides whether a payment is primarily for conservation purposes by evaluating the program's stated objectives, the activities required of the recipient, and the conservation outcomes the payment is designed to produce; if the primary purpose is conservation, USDA makes that finding and transmits it to Treasury for the income-effect determination
- § 14.7 — State and local program payments: state or local government payments for conservation purposes may also qualify if the payment meets the same criteria — primarily for soil/water conservation, environmental protection, forest improvement, or wildlife habitat; USDA must evaluate state programs separately under the same framework
How It Affects You
If you receive payments from a USDA conservation program listed in Part 14 — such as payments for enrolling land in the Water Bank Program, making conservation improvements through the Agriculture Conservation Program, or restoring abandoned mine land on your farm — those payments may be excludable from your federal taxable income. Do not simply treat all conservation payments as taxable — check whether the specific program's payments have received the § 126 exclusion determination.
The exclusion is not automatic. USDA must make the primary-purpose finding, and Treasury must determine that the payment does not substantially increase your property income. Consult your tax advisor about whether a specific conservation payment you received has received the exclusion determination and whether you qualify to exclude it from income on your federal return.
Payments from programs not on USDA's covered list do not qualify for the exclusion under Part 14, regardless of how conservation-oriented they appear. If you receive a payment from a newer conservation program not enumerated in Part 14, that program would need to go through a separate rulemaking to be added to the list.
State and local conservation payments may qualify if they meet the same primary-purpose standard as federal payments. State governments seeking to have their conservation programs recognized as qualifying under § 126 should work with USDA through the Part 14 framework.
Statutory Authority
This rule implements:
- 26 U.S.C. § 126 — Exclusion from gross income of certain cost-sharing payments; authorizes the exclusion of conservation program payments from a taxpayer's gross income when the payments are primarily for conservation purposes and the Treasury Secretary determines they do not substantially increase the taxpayer's income from the property
- 5 U.S.C. § 301 — General departmental authority; authorizes USDA to issue regulations for the conduct of its programs, including the primary-purpose determination framework in Part 14
Recent Rulemakings
No major Federal Register amendments. The primary-purpose determination framework reflects longstanding Treasury-USDA coordination under § 126.