Tax Provision Tweaks in This Year's Farm Bill

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Except for the option for producers to participate in the Average Crop Revenue Election (ACRE) program, the new farm bill's payment and tax policy are predominantly a continuation of the 1996 and 2002 policy. Roger McEowen, ag law professor at IowaStateUniversity, said there are a few changes producers need to be aware of in the latest bill.

Payment caps: The Administration sought hard for farm payment reform. In the end, Congress won with little, if any, payment reform. For the first time the limit is set using a revised adjusted gross income which averages income over the previous three tax years, McEowen explained.

The bill puts a hard cap on non-farm income of $500,000. If farm income is greater than $750,000 ($1.5 million for couples), producers lose direct payments. The total payment cap on direct payments is $40,000 and countercyclical payments at $60,000. For ACRE participants, the direct payment cap is set at $32,000 and countercyclical payments at $73,000.

Direct attribution: The bill closes the three-entity rule which limits the ability to evade payment limits. It also requires a social security number for direct attribution. McEowen said the direct attribution provision is not going to affect very many people at all.

Closing the three-entity rule acts as a means of doubling payments by attributing all payments to the ultimate recipient. It leaves the spouse rule intact and raises the nominal limit on direct payments from $40,000 to $50,000. The Center for Rural Affairs called it the "Norwegian bachelor farmer payment limitation" because it reduces the limit on direct payments from $80,000 to $50,000 for widows and bachelors, but it increases the limit for married farmers from $80,000 to $100,000.

The Center conducted a detailed analysis of 2005 recipients of large direct payments in Georgia, Iowa, Kentucky, Minnesota, Montana, North Dakota and Oklahoma. It found only one farm that would suffer a payment reduction as a result of direct attribution of farm payments. But 73 large farms would receive bigger subsidies as result of the increase in the direct payment limit under the new bill.

Actively engaged in farming: To receive payments, recipients must be legitimately engaged in the farming operation. Previously the GAO identified the lack of a measurable standard for active management as a key cause of payment limitation abuse. According to the GAO, by not specifying such a measurable standard, USDA allows individuals who may have limited involvement with the farming operation to qualify for payments. 

Just last week, Sen. Chuck Grassley, R-Iowa, and Sen. Bryon Dorgan, sent a letter to Ag Secretary Ed Schafer, D-N.D., calling on the administration to close loopholes as stated in their "Statement of Managers" particularly the rules for "actively engaged farmers."

During debate, the Midwest senators introduced an amendment which received a majority of votes but was not approved, and they say can be used as a "starting point" in the rulemaking process.

The amendment specified that:

  • the total contribution of personal labor and active management should be at least equal to the lesser of 1,000 hours or a fifty percent commensurate share of the total number of hours required to conduct farming operations;
  • stockholders or members of an entity that collectively own at least 51 percent of the combined beneficial interest in the entity shall each make a significant contribution of labor and management to the operation;
  • no stockholder or member may provide labor or management to meet the requirements for individuals or entities that collectively receive, directly or indirectly, an amount greater than the payment limit;
  • crop share landowners claiming the special exemption to the actively engaged rules must rent land at usual and customary rates, with the share of the landowner commensurate with the share of the crop or income received as rent; and

Channeling payments: In addition, Grassley and Dorgan wrote to Schafer regarding "devices and schemes" used to get out of payment limitations. The GAO highlighted schemes and devices used to channel payments through "paper" farms and affiliated family-held non-farming entities back through to the same person or entity exercising primary control. The GAO found large farming operations that were structured as one or more partnerships, each consisting of multiple corporations that increased farm program payments in a questionable manner. 

Limitations on farming losses: Farming losses of a taxpayer (other than a C corporation) are limited, for any taxable year in which the taxpayer receives farm subsidies, to the greater of $300,000 (MFJ) or the taxpayer's total net farm income for the prior five taxable years. "I don't see it impacting very many people since few run up to that type of limit," McEowen said.

CRP payments: Conservation Reserve Program (CRP) payments are not subject to self-employment tax in the hands of retired or disabled farmers. For more on the CRP provisions, click here.

Other provisions: Here is a list of other significant tax provisions in the new farm bill. (Click here for more analysis on the below provisions.)

  • The loan limit on Aggie Loans is increased from $250,000 to $400,000.
  • A 15% cap on the tax rate for timber sales by C corporations, and relaxed restrictions on timber real estate investment trusts.
  • The legislation includes authorization of forest conservation bonds for certain qualified projects up to a maximum of $1.5 billion.
  • The cellulosic ethanol per-gallon tax credit is raised from 51 cents to $1.01 per gallon.
  • A decrease in the credit for ethanol production from $.51 to $.45 per gallon.
  • An extension of the special rules encouraging contributions of capital gain real property for conservation purposes.
  • A tax deduction for endangered species recovery and restoration costs.
  • A deduction for endangered species recovery expenditures.
  • An exclusion for certain payments and programs relating to fish and wildlife.
  • A deduction for qualified timber gains.
  • An expansion of tax-deferred exchange treatment to specified property.
  • A new agricultural chemicals security tax credit.
  • A modification in the methods for computing net earnings from self-employment.
  • Information reporting for CCC transactions.
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