You don’t have to look far to find headlines highlighting the high entry costs of farming. For each of those headlines, another one can be found pointing to the issues of the aging American farmer and a “sidelined” next generation waiting for their opportunity to step in. A 65-year-old farmer has faced a lot of challenges in their lifetime from weather volatility and the 1980s farm crisis to the more recently rising cost of capital. There’s no question that they have earned their spot at the head of the operation.

While older generations have unmatched experience and knowledge, we have an eager generation of young farmers who are patiently waiting for their chance to get into the game. Beginning farmers in their 20’s, 30’s, 40’s, and even 50’s simply do not have access to the same resources as larger, established farmers. Not to mention the excessive balance sheet inflation we’ve seen over the past 30 years may never be seen again, adding to the challenges beginning farmers face.

To incentivize landowners to lease their properties to beginning farmers, the Iowa Agricultural Development Division of the Iowa Finance Authority has developed a program aimed at leveling the playing field. The program was launched in 2007 and is called the Beginning Farmer Tax Credit. It provides landowners with an annual tax credit in return for leasing their land to a beginning farmer. This helps the beginning farmer bring value to the landowner and offer higher returns for the same rental rate. A “beginning farmer” is defined in the program by the following:

• Farmer must be 18 years old, a resident of Iowa, and have a net worth of less than $833,000.

• Farmer must have the necessary knowledge to farm, have access to capital to carry out farming operations and have access to the equipment necessary to carry out farming operations.

• The lease must be a minimum of two years, and a maximum of 5 years, and the rental rate cannot exceed 30% above the county average rental rate published by Iowa State University.
  

Once those boxes are checked, the operator can apply before August 1st of the applicable crop year. Applications are on a first-come, first-served basis and will be denied once the $12 million annual tax credit allocation has been met. In addition to applying, there is a one-time application fee that varies based on acres and the term of the lease. The fee ranges from $300 for a two-year lease under 100 acres, and up to $650 for a five-year lease over 250 acres. This fee is paid at the time of application.

Once an application is submitted and approved, the landowner can expect to receive an annual tax credit equal to 5% of the annual rental rate for a cash rent lease or 15% of a predetermined revenue number for crop share leases over the life of the agreement. There is also a 15% tax credit for flex lease agreements.

The example below illustrates how payments may look on an 80-acre farm in Dallas County, Iowa for a fixed cash rent and crop share agreement.

*The table above is to be used as an example only. For exact calculations, please contact the Iowa Finance Authority.

Landowners who enter a crop share agreement can expect to see a much higher tax credit. By crop sharing, the risk is shared between the landowner and operator, which decreases the capital needed by the beginning farmer, who may not have the capacity to pay higher rents.

For cash rent leases, the tax credit goes up with the rental rate, but in theory, the landowner will receive a higher return for their land without charging a higher rental rate. This is a win-win and helps a beginning farmer bring value to the table that an established farmer cannot.

The Beginning Farmer program is a great resource for farmers and landowners alike and can be an excellent tool for transition planning between generations. The program does not state any limitations between family members, meaning a retiring farmer could lease the land to a family member who qualifies as a beginning farmer and take advantage of the tax credit. There’s no question that the next generation of farmers will be as important as the last, and this program can help bridge the gap as aging farmers begin to retire and look for a younger, incoming successor.

Peoples Company’s Land Management division has had great experiences with Iowa’s Beginning Farmer program. We seek collaborative opportunities for landowners and farm operators wherever possible through our diverse network of connections in the agriculture industry. For those interested in learning more about the Iowa Beginning Farmer Tax Credit, please visit the Iowa Finance Authority website here.

Please contact us at 855.800.LAND (5263) or by email at LandManagement@PeoplesCompany.com to learn how we can creatively help meet your landowner goals.