$900K Can Mean $1.8M
Most Farm Service Agency (FSA) programs have a payment limit and an Adjusted Gross Income (AGI) limit. The general AGI limit for almost all farm programs is $900,000.
If the farm is an entity (corporation, LLC, LP, LLP, LLLP, etc.). then the limit is applied first at the entity level and then it drops down and is applied to each of the owners of the entity. A three-year average AGI is used with one year in arrears. For 2020, the average is 2016-2018 and there are no adjustments for extraordinary items.
Example: ABC LLC shows average AGI of $800,000. It is under the limit, however, A shows average AGI of $1.1 million, therefore its ownership share of the payment is disallowed at the LLC level.
Married farmers who file a joint return and the average AGI on those returns exceed $900,000 may be notified by the FSA that their AGI exceeds the limit. In this case, the farmer is allowed to have their CPA or attorney provide a letter to the FSA indicating what AGI would have been if the farmer had filed a married filing separate return. There is no requirement to file a separate return.
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) this almost automatically increases the AGI limit to $1.8 million since almost all income and deductions are assumed to be split 50/50.
Example: John and Jane Smith live in Washington state and file a joint return and report average AGI of $1.7 million. If they had filed a separate return, John and Jane each would report $850,000 AGI and both be under the limit.
However, if the married couple lives in a separate property state, then the actual AGI will be determined based on income specifically allocated to each person. This may not be as beneficial.
Example: In our previous example, John and Jane live in Oregon and she receives average W-2 income from being a doctor in Portland of $1.25 million. In this case, she is over the limit and John is under the limit. Only John can qualify for a payment.
Planning may be needed to reallocate ownership among the spouses to optimize the income split if AGI approaches the AGI limit.
Some will ask “What about a general partnership”? There is no AGI limit on a general partnership or qualified joint venture. In this case, we simply look at the AGI of each partner.
Example: AB general partnership reports $1.6 million of average AGI. however A and B each report less than $900,000 of average AGI, therefore the AB general partnership is allowed to keep all of its FSA payments.
For CFAP related payments, you are allowed to exceed the $900k limit if more than 75% of your AGI is from farming (which is very broad but may not allow farm equipment sales to count as AGI) and the new law just passed appears to allow even more payments with little or no limit. However, this will require guidance from FSA to determine exactly what this means.
In conclusion, the $900k AGI limit may or may not apply. It will always depend on your situation.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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