Not Much Good News on ERP
I just got off of a webinar with the North Dakota CPAs and the North Dakota FSA office dealing with the Farm Adjusted Gross Income (AGI) issues that CPAs and Attorneys have been dealing with since the program was announced a few weeks ago.
I wish I could say it is all good news but it is not. We will review the good news first and then go into (in great detail) the bad news.
Who Files the FSA-510?
Only an entity such as corporation or LLC is required to file Form FSA-510 unless any of the owners are also participating in the ERP including any indirect ownership. In that case, those owners would also need to file a FSA-510. As an example:
ABC Farm Corporation is owned by three owners A, B and C. Each owner only has a farm operation through ABC, therefore only ABC is required to file FSA-510. Now let’s assume that A also farms and collected an ERP. Then A would also need to file FSA-510 to determine if AAA Farm Corporation and A would get the extra payment limit and how it would be allocated between A and AAA.
If you are general partnership or formal joint venture or informal joint venture, then each of the members will need to file FSA-510. The GP and JV will not file this form.
Can you you receive regular payment and then get additional payment after filing FSA-510?
You are allowed to file your current application without the Form FSA-510 and get the regular payment and then file FSA-510 at a later date and within a few days you will receive the updated payment amount. This likely should be done no later than July 22, 2022 but there is not an official due date on this yet.
How Should Married Couples Determine AGI?
Income between a husband and wife will be based on how they each would report AGI assuming the married couple had filed a return using married filing separate. This will make it much easier for the farmer to qualify separately when the spouse has a fair amount of non-farm income such as wages from teaching, etc. However, spouses in community property states may be out of luck since technically that income has to be reported on a 50/50 basis no matter who earns the income. The FSA stressed that this needs to be how it would be reported on an income tax return.
That is it for the good news. Now for the bad news.
How Are Equipment Gains Included in Farm AGI?
You are only allowed to include gains from equipment sales or trades if farm AGI without the equipment gains is greater than 66.66% of total AGI including the equipment gains (update from previous post). This same rule applies to the sale of farm inputs and services to farmers.
The bottom line is if you have large gains from trading in farm equipment in 2018 and 2019 you will likely not qualify for the extra payment limit at all. This usually resulted in low or negative farm AGI to be used in the formula and thus you can’t include the gains.
What about NOL’s and Negative AGI?
This is where the FSA logic gets a little hard to understand and follow. However, I am going to do my best to explain what I heard and saw.
The FSA has a formula that they require producers to use to determine if their farm AGI is greater than 75% of overall AGI as follows (per the Form FSA-510 instructions):
- Determine the total AGI and the total farm AGI for each of the previous three years.
- Total the AGI (both farm and nonfarm income) for all three years.
- Total the Farm AGI for all three years.
- Calculate the percentage of average Farm AGI by dividing step 3 by the result of step 2. The percentage calculated must be equal to or greater than 75 percent to qualify for program benefits.
A slide indicated that a large NOL may not qualify the producer for the increased payment limit. However, it was indicated that you must follow the formula above to determine if you have a positive number greater than 75%. If you do, you qualify, even if both farm AGI and overall AGI is negative (a negative divided by a negative is a positive) and when you have negative farm AGI greater than 75% of overall AGI, then the result is a positive and it will be greater than 75% in all cases.
However, if you have positive average Farm AGI and your overall AGI is negative, then you don’t qualify since it will be a negative number even though 100% or more of your overall positive AGI is from farming.
Let’s look at some examples:
Ed has average farm AGI of $400,000 but his overall AGI is minus $1,000. His percentage is a negative 40,000% and he does not qualify for any increased payment limit.
Ed has average farm AGI of -$25,000 and overall AGI of -$250,000. His percentage is a positive 10%.
Ed has average farm AGI of -$75,000 and overall AGI of -$90,000. His percentage is a positive 83.33% and now he qualifies for the increased payment limit.
Ed has average farm AGI of -$75,000 and overage AGI of -5,000. His percentage is a positive 1,500% and now he qualifies for the increased payment limit.
Ed has average farm AGI of -$2.5 million and has interest income of $2.49 million to get overall AGI to -$10,000. His percentage is 25,000% and he qualifies for the increased limit.
However, if his overall AGI was $10,000, then it would be a negative 25,000% and not qualify.
IS THIS REALLY WHAT FSA INTENDED WITH THIS FORMULA. We remember that under Section 199A there was the rumor that negative farm cooperative AGI could actually increase the Section 199A deduction due to the formula the IRS had in their instructions, etc. This was found to be false and will FSA reach the same conclusion. They certainly did not on this call.
Less than Three Years of AGI
If you are a person you will use all three years of AGI even if you were not farming for all three years to determine if you meet the test.
If you are disregarded entity that has at least three years of AGI, then you will determine AGI at that level even if you did not file a return. At least I think that is what the slide indicated. If your farm operation is a single-member LLC and files a Schedule F on your Form 1040, you only determine AGI based on that single-member LLC and ignore all other income reported on Form 1040. This could be good news but if you have large trade-in gains you will be out of luck in most cases.
If you did not file taxes for all three base years, then you use the average of the years that you filed income tax returns. If the new entity takes over an existing operation and has elements of common ownership with the preceding legal entity or persons, etc. then you will also include that AGI in your calculations. This could get a little messy to determine.
If there are no years of income tax filing for an entity, then farm income will be considered zero and you do not qualify for the increased payment limit. Here is an example:
CRP Farms LLC is created in 2021. The members of CRP Farms LLC were not involved in farming. During 2021, the LLC received crop insurance proceeds and qualifies for $300,000 of ERP. Since CRP Farms, LLC did not file an income tax return for 2017-2019, its farm AGI is zero and does not qualify for the increased limit.
However, if CRP Farms LLC is a continuation of C, R and P farm operations or another farm entity, you will be able to use those years in making the AGI calculations.
What if a CPA or Attorney does not prepare my tax return?
You are required to have a CPA or attorney either sign the Form FSA-510 or write the approved letter. You will need to find one who can do that for you. Certainly our firm is an option too.
We have tried out best to recap the call today. There will likely be some changes to this in the next few days. We are actively reviewing this with appropriate authorities in Washington DC to see if we can get changes made, but for now, these are the rules.
We will keep you posted.
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.
Dear Paul,
Who Files the FSA-510?
Only an entity such as corporation or LLC is required to file Form FSA-510 unless any of the owners are also participating in the ERP including any indirect ownership.
Does this mean that a farmer that operates as a sole-proprietor (no other entities involved) does not have to file the FSA-510?
Does this mean that a farmer that operates as a sole-proprietor (no other entities involved) automatically qualifies for the increased limit.