The House Farm Bill proposal has an option to increase the payment limit from the current $125,000 to $155,000 beginning with the 2025 crop year and then index it to inflation. However, in order to qualify for the increase, your adjusted gross income (AGI) from farming must be greater than 75% compared to total AGI.
The wording of the bill indicates that this test is applied to an individual or entity but does not include the new “qualified pass-through” entity. Therefore, the test for any entity taxed as a partnership or S corporation will be determined at the owner level to see if either the $125,000 or $155,000 limit will apply. Let’s look at some examples (these are based on a three-year average): Gretchen has a Schedule F that shows $75,000 of net income including any related equipment gains on Form 4797. Her spouse shows $50,000 of wage income. As a couple, Gretchen would not qualify for the increased payment limit. However, she may get an attorney or CPA to write a letter indicating if she filed separately then she would qualify. But remember, the increased payment limit only helps if she has payments greater than $125,000.
Let’s assume that Gretchen is single and has Schedule F income of $65,000 and also works in town making $30,000. She would not qualify for the increased payment limit.
ABC Farm Corporation has $200,000 of farm income reported on a substitute Schedule F but has income of $100,000 from wind turbine leases. FSA considers all of this income to be farm income and would qualify for the increase.
ABC Farm Corporation has $500,000 of farm income, but also $200,000 of income from an investment in a non-farm activity. Since farm income is less than 75% of total income, then the corporation does not qualify for the increase.
Let’s assume that ABC Farm Corporation has four equal owners who all have farm AGI over 75%. Since this is an C corporation, the payment limit remains at $125/155,000. However, if it was an S corporation, its payment limit would be four times as high, however, it is likely there would be a reduction since all of the owners likely received farm program payments too. Remember, that the maximum is split between entities and owners to make sure the payments do not exceed the maximum allocated jointly between owners and entities.
As an example, assume that the corporation qualified for $500,000 of payments and each of the four owners qualified for $100,000 for total qualified payments of $900,000. The maximum that can be paid to the corporation and the four owners if $620,000 (4 X $155,000) and thus a pro-rata reduction would be applied.
XYZ Farms LLC has four equal owners. The LLC qualifies for $700,000 of payments, however, three of the owners have farm AGI less than 75%, therefore, the LLC will only receive $530,000 instead of the maximum $620,000 allowed if all four had farm AGI over 75%.
MNO Farms, a general partnership, qualifies for $1 million of farm program payments. It has 7 equal owners, however, none of them have farm AGI greater than 75%, therefore, the partnership will only receive $875,000 instead of the full $1 million if all were greater than 75%. Also, if any of the owners received a payment, then a pro-rata reduction would be applied to MNO payment too.
Now, let’s assume that MNO Farms only has four actively involved owners and the other three are not involved at all. Of the four actively involved farmers, three have farm AGI over 75% and one does not. In this case, the total amount of farm payments allowed is three @ $155,000 and one @ $125,000 or a total of $590,000. The three that are not involved removes those payment limits from the calculation. Also, pro-rata reduction may be applied to MNO.
As you can see, in some cases you will get the increase and in other cases you would not. However, this is just a proposal, and it will require the House to vote yes on it and for the Senate to agree. This likely will not happen but we may be pleasantly surprised.