Tax preparers have always felt uncomfortable policing their clients’ farm program eligibility. Now certification under the 2014 farm bill is only continuing to add to their heart burn.
USDA’s current definition of Adjusted Gross Income (AGI) could deny farm families from receiving government payments if they operate as either an S corporation or Limited Liability Corporation (LLC) taxed as a partnership. That rule could also throw a wrench into many garden-variety farm estate plans, speakers told 200 professionals gathered in Indianapolis this week for an American Institute of CPAs conference. The message didn’t go over well.
Under the 2014 Farm Act, farmers must not generate a three-year average Adjusted Gross Income greater than $900,000. The test applies first to legal entity levels (S corporation, LLC, LLP, etc.) and then to the individuals in that entity. For the sizable 2014 corn Agricultural Revenue Coverage-county payments growers will collect in early October, USDA will be averaging tax years 2010, 2011 and 2012 — unusually high income years when many went on equipment spending sprees.
The problem is that USDA’s Farm Service Agency’s definition of AGI excludes all Section 179 depreciation for legal entities such as LLPs, LLCs, and Sub S corporations. That decision befuddles CPAs since it creates a type of phantom income that would deny all farm program payments to these types of entities even though a regular corporation or individual would receive payments under the same conditions.
“It’s not unusual for four family members organized as an LLC to have $1 million average incomes and possibly $500,000 a year in Sec. 179 spending from those years,” said CliftonLarsonAllen agricultural CPA Paul Neiffer, president of the Farm Financial Standards Council.
“Suddenly, this conflicts with good estate and business planning techniques that help family’s transition ownership to another generation, or maybe save $5,000 a year in self-employment tax,” Neiffer said. Small business owners commonly use LLPs and LLCs for legal liability issues as well.
Unfortunately, such sound business practices could jeopardize payment eligibility, Neiffer added. He expects his home county of Benton, Washington, to generate 2014 ARC-County corn payments of about $115 a base acre, so many operators could be missing out on the maximum $125,000-per-person payments.
The irony in this new AGI definition is that USDA ignores income from capital gains, section 1231 gains on breeding stock or even bonus depreciation. Why USDA ignores some kinds of income or deductions and not the other doesn’t make a lot of sense, CPAs attending the conference said. Neiffer speculates it’s just that those items appear on a different page on the tax return.
Steve Troyer, a CPA with Eide Bailey in Fargo, N.D., certifies income for hundreds of farmers across the Dakotas and Minnesota. It’s become a cottage industry for him since so many local tax preparers “throw their hands up” when they see these USDA forms, he told DTN. Like Neiffer, he expects a number of family farms might bump up against the Farm Bill’s synthesized definition of AGI.
“Our state FSA office knows the problem. We’d just wish they would listen to us,” Troyer said. “The bottom line is that IRS has a definition of Adjusted Gross Income that’s a line on form K-1. We’re not saying FSA needs to go to a lot of extra work to use it.”