More Types of Income Qualify as Farm Income
MFP and CFAP allows your average adjusted gross income (AGI) to exceed $900,000 as long as more than 75% of your income is from farming. Average AGI is based upon a three-year average excluding the most immediate tax year. For example, CFAP is a 2020 program and average AGI is based upon 2016-2018.
The FSA definition of farming income has always been a bit murky. In their manual they had always taken the position that wages could never be farm income. Also, they had not addressed whether dividends from an IC-DISC was farm income or not. Our position was that IC-DISC income derived from sales of farm products would always be farm income, but it was never clearly defined.
We now have good news on these items of income. USDA just released Notice PL-290.
In the notice, FSA indicates that IC-DISC dividend income will qualify as farm income as long as the IC-DISC is materially participating in a farming, ranching or forestry activity.
Wages from a closely-held entity will now qualify as farming income as long as the entity:
- Is owned, directly or indirectly, by 5 or fewer individuals owning at least 50% of the entity; and
- It materially participates in farming, ranch, or forestry activity.
Also, any legal entity comprised entirely of family members as described in 5-PL, paragraph 213, that materially participates in farming, ranching, or forestry activities.
The definition of materially participating for purposes of this ruling is that more than 50% of the entities gross income is from farming, ranching or forestry activities over a 3 year period.
This likely will allow many more farm operations to fully qualify for CFAP and MFP payments that may have had limits placed on it in the past due to one or more owner’s being over the $900k AGI limit.
As an example, assume the the DEF Farm, Inc. has three equal owners. The LLC qualified for $750,000 of CFAP payments, however, two of the owners AGI were over the 900$ limit AND they received wages from corporation that could not be counted as farm income, thus they could not meet the 75% AGI from farming requirement. Under the new rule, since this is a closely held entity and it materially participates in farming, instead of receiving $250,000 of payments, it will now qualify for the full $750,000.
If you had previously been denied payments based on the original definition of farm income, you may want to contact your local FSA office to see if you can change your Form CCC-942 to reflect the updated rules.
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.
Do cash rents paid to the shareholder (similar to wages in theory) from a closely held C corporation meet the definition of farm income for the shareholder and allow the individual to use the exception to the $125k limitation?