In August, the USDA, Farm Service Agency (FSA) and Commodity Credit Corp. (CCC) released information that provided clarity in regard to farm income and active management. Let's take a quick look at the recent clarifications.
Under the Market Facilitation Program and Coronavirus Food Assistance Program, your average adjusted gross income (AGI) could exceed $900,000 as long as more than 75% of your income comes from farming.
But what is farm income? In the past, wages could not be included in farm income. For those with farming corporations, this was a huge disadvantage. There also have been questions about whether IC-DISC (Interest Charge Domestic International Sales Corp.) dividends are farm income (for those who export). Luckily, USDA released Notice PL-290, which adds some clarity. To summarize:
-- Wages from closely held entities qualify as farm income if the entity is owned by five or fewer individuals owning at least 50%, and the entity materially participates in farming.
-- IC-DISC dividends will be treated as farm income if the IC-DISC materially participates in farming.
The clarification of farm income could help those who had payments limited by AGI.
ACTIVE PERSONAL MANAGEMENT
Another clarification that came out in August involves active personal management in a farming business. Unlike the changes to farm income, the active-personal-management changes are more restrictive.
For context, many farm operations have members who are actively involved in farming (i.e., labor) as well as some family members who are not providing labor but provide personal management. If the farming operation is a general partnership or joint venture, and the personal management is significant, the farm operation may qualify for additional payment limitations.
Under the old rules, contributing personal-management hours that are critical to the farm's profitability, taking into consideration the person's share of the farming operation, was enough to qualify for active personal management. However, under the rule set forth by the CCC and FSA on Aug. 24, the new standard is the following:
"For active personal management, includes activities performed by a person, with a direct or indirect ownership interest in the farming operation or a legal entity, on a regular, continuous, and substantial basis to the farming operation and meets at least one of the following to be considered significant:
-- Performs at least 25% of the total management hours required for the farming operation on an annual basis; or
-- Performs at least 500 hours of management annually for the farming operation."
The new standard requires more management participation than the old standard. Because of the bright-line test, partners should keep a log of their management participation to substantiate their involvement. However, spouses will continue to qualify for additional payment limitations as long as their spouse is providing significant management or labor.
DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at www.about.dtnpf.com/tax. You may email Rod at firstname.lastname@example.org.
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