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With all that’s been going on, you might have missed it, but on August 24, 2020, the USDA Farm Service Agency (FSA) published the new, final, Payment Limitation and Payment Eligibility Rule. The rule became effective on August 20, 2020. It implements changes made by the 2018 Farm Bill for commodity program payment eligibility requirements and limitations. If you are doing farm expansion, restructuring or succession planning, tax planning, or insurance planning, you’ll want to get caught up.
Changes to Payment Limits
The 2018 farm bill makes four changes to the general payment limitations, which the new rule accomplishes:
it removes Marketing Loan Gains (MLG) and Loan Deficiency Payments (LDP) from the overall $125,000 payment limitation so that a farmer may receive an unlimited amount of MLG or LDP in addition to Agriculture Risk Coverage (ARC) or Price Loss Coverage (PLC) payments up to the $125,000 limit;
it also removes the payment limit for the Emergency Assistance for Livestock, Honeybees and Farm Raised Fish Program (ELAP);
it provides for a separate per crop year maximum per person and legal entity limitation of either $125,000 for payments to those who purchased basic 50/55 NAP (Noninsured Crop Disaster Assistance) coverage or $300,000 for payments to those who purchased buy-up coverage (versus previously where the payment limit was $125,000 regardless of the level of NAP coverage a producer elected to purchase); and
it increases the Emergency Conservation Program (ECP) payment limit to $500,000 per program per disaster event.
Changes to Who is Eligible for Payments
Current law requires that a person “must be actively engaged in farming with respect to the operation” to be considered eligible to receive farm program payments. Additionally, a person must make a “significant contribution” to an operation through a combination of capital, equipment, land, active personal labor or active personal management. The new rule now requires anyone trying to qualify for federal subsidies as a farm manager to comply with rules that had previously applied only to joint ventures or general partners―a significant change from prior standards that allowed anyone on a family farm to become eligible if “crucial to the profitability of the operation.” It also increases the threshold for what qualifies as a “significant contribution.”
Specifically, under the new rule, “active personal management” requires personal participation in activities that are “critical to the profitability of the farming operation” and within one or more of managing capital, managing labor or managing the agronomics and marketing of crops. And a “significant contribution” provided through “active personal management” requires “activities performed by a person, with a direct or indirect ownership interest in the farming operation or a legal entity, on a regular, continuous, and substantial basis to the farming operation and which meets at least one of the following to be considered significant:
Performs at least 25 percent of the total management hours required for the farming operation on an annual basis; or
Performs at least 500 hours of management annually for the farming operation.”[i]
A “significant contribution” to the farming operation provided through labor capital requires at least 1,000 hours in a calendar year of labor or 50% of the total hours for the person’s share of the total hours needed for operating the farm.
A “significant contribution” to the farming operation provided through capital must come from sources that are separate and distinct from others in the farm, does not include the value of the person’s labor or management contribution and must be “a direct out-of-pocket input of a specified sum or an amount borrowed by the person or legal entity and does not include advance program payments.”[ii] And, whether for land, capital or equipment, must be at least 50% of the person’s share of the farm.
A person can also contribute a combination of labor and management and the regulation contains a table for the hours necessary.[iii]
Changes to the Definition of “Family Member”
The 2018 farm bill allows farms to add additional members to the farming operation who are eligible for payments. Specifically, the bill expanded the definition of “family member” to include first cousins, nieces and nephews in addition to lineal ancestors (great grandparent, grandparent, parent), descendants (child, including legally adopted children and stepchildren, grandchild, great grandchild), spouses and siblings. The USDA’s regulation implements this expanded definition.
This change allows farming operations to qualify for additional payments (up to the $125,000 limit each). Adding a family member is considered a bona fide and substantive change in the farming operation, which is required in order to add persons to the farming operation that increase the number of payments to the operation. In addition, family members are a special class for purposes of being considered actively engaged in farming and, thus, eligible for payments if they meet the labor and/or management requirements, or if they elect to qualify based on having a commensurate share of profits, losses and risk in the operation. As such, with this expanded definition, a joint operation comprised of the newly expanded definition of family members is no longer subject to the limitation of members qualifying on a management contribution alone, which increases the number of additional individuals eligible for payment within joint operations made up solely of family members.
Changes to the Adjusted Gross Income Limitation to Protect Environmentally Sensitive Land
The rule implements a provision in the 2018 Farm Bill that allows a waiver of the adjusted gross income (AGI) limitation of $900,000 for participants of certain conservation contracts administered by FSA or NRCS. Specifically, the U.S. Secretary of Agriculture can waive the AGI limitation when the Secretary determines that the contract is for “environmentally sensitive land of special significance [that] will be protected because of the waiver.”[iv] The AGI limitation is in place to prohibit payments to participants who have an average annual AGI exceeding $900,000 (over 3 years). “Environmentally sensitive land of special significance” includes (1) habitat for threatened, endangered or at-risk species, (2) native grasslands, (3) unique wetlands, (4) land with soils that are considered rare, unique or related, (5) land that is critical for groundwater recharge, and (6) lands with historical or cultural resources.[v]
Now you’re caught up!