There's a lot of fine print in how USDA calculates income eligibility for farm programs under the new farm bill. Just be aware that there's no single definition of the "Adjusted Gross Income" rule that fits all individuals and business structures, as I reported from the annual American Institute of CPA agricultural meeting several weeks ago. The bottom line is that some family farmers organized as Subchapter S and limited liability business structures (LLPs, LLCs, etc.) may be shocked to learn they won't be eligible for even a single dollar beginning with the 2014 crop year payments scheduled this October, instructors warned the audience.
Under the 2014 Act, Congress determined that anyone with a three-year average Adjusted Gross Income of $900,000 and up would be ineligible for farm program benefits. But Farm Service Agency rules treat different kinds of taxpayers differently. The most glaring difference is some structures count Sec. 179 deductions in their AGI and others don't. According to Roger McEowen, director of the Center for Agricultural Law and Taxation at Iowa State University:
--For individuals, the pertinent line is Form 1040, line 37. In effect, that amount subtracts up to $500,000 annually for Sec. 179 depreciation, for the tax years 2010-2012.
--For C corporations, FSA computes AGI from line 30 (taxable income) plus line 19 (charitable contributions). In effect, this also allows C corps to deduct up to $500,000 annually in Sec. 179 depreciation from their AGI income.
--For S corporations, FSA looks only at line 21 of IRS Form 1120S (ordinary business income or loss). This does not account for Sec. 179, in effect potentially inflating income compared to C corporations and individuals.
--For estates and trusts, FSA uses line 22 (taxable income) plus line 13 (charitable deductions) of IRS form 1041.
--For limited liability companies (LLCs), limited liability partnerships (LLPs), limited partnerships (LPs) or similar entities, FSA looks to IRS Form 1065, line 22 (total income from trade or business) plus line 10 (guaranteed payments to partners). In effect, this number is before an adjustment for Sec. 179 spending, again treating LLCs more harshly than C corps or individuals.
Another inconsistency relates to livestock producers. Those entities with 1231 gains from the sale of raised breeding stock don’t have to count this income in their AGI. In dairy country, those gains are a big deal and can run into hundreds of thousands of dollars, a northern Indiana CPA tells me.
Another CPA and DTN reader, Michael Lynch of Hicks, Williams, Crawford and Lynch LLP in Rancho Cucamonga, California, observes that many of his agricultural clients don't use much Sec. 179 depreciation, but many have large 1231 gains. "If they (FSA) were to ignore the 1231 gains in the calculations, many clients would go from being over the $900,000 to under for the three-year average," he says.
Iowa State's McEowen concludes that someone organized as an S corp or LLC is disadvantaged compared to a C corp with the same circumstances.
For farm program payment purposes, the best arrangement for multi-family member businesses is to be organized as a general partnership. That's not ideal for legal liability reasons however.
Go figure. It's complicated.
Subscribers can find the more detailed article on this topic under the Farm Business page, "Eligibility for Farm Programs in Question."
For a copy of Roger McEowen's explanation, go to https://www.calt.iastate.edu/…
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