What CPAs should know about likely changes to the Farm Service Agency payment, AGI limits
Paul Neiffer, CPA | August/September 2024 Footnote
There will be a new federal farm bill either this year or next — the U.S. House Agriculture Committee has released its proposal and the Senate proposal may be released by the time you read this article.
Although the new farm bill is not yet final, CPAs should understand how some proposed changes (including the current rules) will affect their farm clients.
Possible changes to the AGI limit
First, the current adjusted gross income (AGI) limit for farmers is $900,000 per taxpayer; however, the reality is that the real AGI limit is $1.8 million, because the Farm Service Agency (FSA) allows CPAs or attorneys to write a letter informing FSA what the farmer’s AGI would have been if they had elected to file married filing separately. It does not require an actual MFS return, simply a letter.
The FSA and AICPA worked together to create the sample letter that is provided in the pertinent FSA handbook(s). The CPA simply reviews the income tax return, calculates what AGI would have been for a three-year period — excluding the most recent full tax year — and provide this information in the letter. For the 2024 crop year, the three-year average is 2020-22. There are times when the state office will ask for copies of the returns to verify the information.
Some offices will ask the CPA to sign the pertinent FSA form; however, our ethics guidelines do not allow us to sign the form. Rather, the letter is sufficient. If there is pushback from the local FSA office, provide a copy of the portion of the FSA handbook that indicates the letter is allowed.
The House Ag Committee proposal retains the current limit. However, the current Senate ag outline indicates the AGI limit would be reduced from $900,000 to $700,000. Again, for most farmers this would be a $1.4 million limit for Wisconsin and up to that number for Minnesota and other separate property states, depending on the ownership of the marital community assets.
The Senate proposal does increase the limit to $1.5 million for specialty and high-value crops. The final AGI limit will be at least $700,000 and it appears it will remain at the $900,000 level.
Possible changes to the payment limits
The House Ag Committee proposal retains the current payment limit at $125,000, though farmers who can show that more than 75% of their AGI comes from farming will see that payment limit increase to $155,000 in 2025 and adjusted for inflation each year thereafter.
The proposal also specifically states that the following income will be considered farm income:
- Gains from selling farm equipment.
- Agritourism income.
- Direct-to-consumer marketing of agricultural products.
This is extremely beneficial because most farmers fail the 75% AGI test under current FSA rules since, in almost all cases, farm equipment gains are not considered farm income by FSA. In order for a farmer to qualify as a farmer under current rules, their farm AGI excluding equipment gains must be at least 66.66% percent of total AGI including equipment gains. Any farmer with equipment gains due to the Tax Cuts and Jobs Act will likely not be a “farmer,” but this change would eliminate that issue.
Conservation Reserve Program (CRP) payment limits are currently $50,000 per individual or entity. The proposal increases the payment limit to $125,000 per individual or entity.
The AGI limits will not apply to conservation programs as follows:
- Agricultural Land Easement Program (ALE).
- Wetland Reserve Easements (WRE).
And if farm AGI exceeds 75%, then the following programs have no AGI limit:
- Livestock Indemnity Program (LIP).
- Livestock Forage Program (LFP).
- Emergency Assistance for Livestock, Honeybees and Farm-raised Fish (ELAP).
- Tree Assistance Program (TAP).
- Noninsurance Crop Disaster Assistance Program (NAP).
Sec. 1603 of the House Ag Committee proposal changes the entity payment limit to make qualified pass-through entities similar to general partnerships. Under current rules, an LLC or corporation or any other pass-through limited liability entity cannot obtain more than one payment limit even with multiple owners while a general partnership or joint venture has no payment limit. Rather the limit is applied based on each owner of the GP or JV.
This section removes the one payment limit and simply states that a qualified pass-through entity will receive payment limits based on their owners similar to the current general partnership rules.
A qualified pass-through entity includes the following entities:
- A partnership as defined by subchapter K of the Internal Revenue Code.
- A limited liability company (LLC) that does not elect to be taxed as a corporation.
- An S Corporation.
- A joint venture or general partnership.
However, if the farmer is a C Corporation, it will continue to retain the one payment limit.
Also, it appears that each of the legal entities will continue to have an individual AGI limit but not a payment limit. Only general partnerships and qualified joint ventures will be exempt from the AGI limits.
This would be welcome news to farmers and their legal and tax advisers; however, be forewarned the Senate likely has several proposals to strengthen AGI and payment limits, and this will be a battle to see who wins. One of the Senate proposals is if a landlord owns farmland and their AGI is more than the $700,000 limit, then no payment will be allowed on that farmland. This essentially penalizes a farmer whose AGI is under the limit since, under current rules, that farmer would qualify for a payment.
The Senate Ag outline currently does not have any changes in this area.
Stay aware of forthcoming changes
The bottom line is that some changes will be coming to both AGI and payment limits and Minnesota CPAs who work with farmers should know how it might affect their farm clients.
Paul Neiffer, CPA is an agribusiness and business adviser specializing in income taxation and accounting services related to farmers and processors.
