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New payment limit rules to kick in for 2009 crop yearBut you might want to start thinking about potential changes now By Sara Wyant One of the most contentious issues in this 2008 farm bill debate revolved around who should receive farm program payments and how much. For years, reformers like Sen. Chuck Grassley, R-IA, and Byron Dorgan, D-ND, have argued that payment limitations should be dramatically reduced and targeted at smaller producers. However, those who believe that payments should be tied to production, enabling the largest producers to still capture the most payments, prevailed on most points. U. S. Department of Agriculture officials are still in the process of writing the new rules and regulations. However, most attorneys and accountants I've talked with say that, for the most part, only a small number of producers will be negatively impacted by the changes. Attorney Allen Olson, who works full-time on farm program issues, said the biggest change in the new payment limitation rules is elimination of the three-entity rule which effectively allowed an individual to double his or her payment eligibility. Another major change is adding three-year-average Adjusted Gross Income (AGI) caps of $750,000 on farm income and $500,000 on non-farm income. Previously, that limit was set at $2.5 million, unless 75 percent of the income came from agricultural sources. Will you need to restructure your farming operation? Olson said the answer is likely "yes" for anyone who has been relying on the three-entity rule. "With the new AGI requirement, you could see circumstances that would require restructuring such as by removing a partner who doesn't qualify," Olson said. There will be a lot of operations whereby the way they are set up now will be completely adequate for the new law. "But there are a whole bunch of operations out there that needed to be restructured under the old law, because they weren't doing it right, and they will have the same need to come into compliance under the new law that they had under the old."
Land sales included Olson said the farm-income AGI cap poses a potential problem for any farmer selling land. Even if that land was sold in 2006, '07 or '08, before the new rules were known, with past three-year AGI averaging, a sale could push a farmer over the limit. "The other situation, particularly on large operations, is that often there is one person who owns most of the land and the equipment and rents that to the partnership, which you can do as long as you charge market values," Olson points out. He warns that "those values can be high on both land and equipment and that could push some larger individuals over the $750,000 limit." Because of the new AGI rules, producers now will be required to have their CPA certify their AGI for the past three years, complete with a breakdown for large joint returns of what each spouse's AGI would have been if they had filed separately. That's because the new farm bill allows a spouse who meets certain qualifications to automatically qualify under the new $750,000 farm income and $500,000 non-farm income caps on payment eligibility. Certification will need to be done before filing an annual 502 form.
Leases can trigger April Hall, a consultant with Kansas-based accounting firm Kennedy and Coe, said producers should also understand the potential impact of the new payment rules on flexible or variable leases. These types of leases can be attractive to tenant and landowner due to fluctuating markets and can be considered cash leases if the rental payment is not contingent on actual production or crop proceeds from the farm, Hall says. However, leases that provide for a bonus, based on price and/or production, can be considered as crop-share leases and can make a producer ineligible for payments. When in doubt, you should provide a copy of your lease to your local Farm Service Agency office and ask for a written determination, she advises. The new rules don't take effect until the '09 crop year, so most folks will have plenty of time to review the new regulations and consult with their financial advisers. Failure to do so could be costly. Violating payment limitations rules can have severe consequences, Olsen added. "Some or all program payments may be lost for the current crop year. Payments received in prior crop years may have to be refunded. A farmer may also be barred from receiving any future payments. In extreme cases, the USDA Office of Inspector General may seek criminal prosecution."
Editor's note: Columnist Sara Wyant is president of Agri-Pulse Communications, Inc. and publishes a bi-weekly newsletter, Agri-Pulse, on food and farm policy. For more information, you can e-mail her at Agripulse@aol.com. 8/18/08 Date: 8/14/08
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