This article is the first of two articles covering those eligibility changes. First up is the evolution of and recent changes to USDA’s benefit limits based on adjusted gross income (AGI).
Evolution of AGI qualifications. Congress first included an AGI limitation on farm program payments in the 2002 Farm Bill and has made several adjustments in recent farm bills. Below is a history of AGI limits for farm program payments that was compiled by the Congressional Research Service.
When reviewing whether AGI limitations are applicable, the rules generally look to the last three taxable years preceding the most immediately preceding complete taxable year with an exception noted in the chart above for Market Facilitation Payments (MFP).
Change to AGI qualifications. Historically, income from wages or dividends received from a legal entity were not considered farm income, but that has changed with the most recent update of the USDA 5-PL handbook for payment eligibility, payment limitation and adjusted gross income.
Since corporate businesses provide wages and dividends, the rules have been updated to include them, meaning that wages and dividends from the following types of entities now need to be included in determining whether AGI limitations for farm program payments apply:
- An Interest Charge Domestic International Sales Corp. (IC-DISC) materially participating in the farming, ranching or forestry activity where the dividend is derived from farming, ranching or forestry.
- A “closely held” legal entity materially participating in a farming, ranching or forestry activity, defined as owned — directly or indirectly — by five or fewer individuals holding more than 50% ownership interest.
- A legal entity comprised entirely of family members when the legal entity is materially participating in farming, ranching or forestry.
In this context, materially participating is defined as more than 50% of the legal entity’s gross receipts (for each tax year in the three-year period used to complete the average farm AGI) derived from farming, ranching or forestry sources.
It is important to note that materially participating in this context is much different than taxpayers determining material participation for items such as self-employment tax and the passive activity rules.
As the rules continue to get more complex, it is more important than ever that farm advisers be well-versed in not only federal and state income and estate taxes, but also how planning strategies and entity formation may affect farm program payments.
Arezzo is a senior tax consultant for Farm Credit East.