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Farm commodity program payment limits have been in effect since the Agricultural Act of 1970. Under the Farm Security and Rural Investment Act of 2002 (2002 Farm Act), these payment limits were $40,000 per person per crop year for direct payments, $65,000 per person per year for counter-cyclical payments, and $75,000 per person per crop year for marketing loan gains and loan deficiency payments. This $180,000-limit could be doubled under the spousal rule allowing a husband and wife to be treated as separate persons for purposes of the limit or by utilizing the three-entity rule. Under the three-entity rule, an individual could receive a full payment directly and up to a half payment from each of two additional entities. Furthermore, since producers could use commodity certificates without limit, marketing loan benefits were essentially unlimited. Because of these legal and regulatory provisions available for avoiding the limits, only a small percentage of producers actually reached the payment limit, and payment limits have had little effect on the distribution of farm program payments.
The 2002 Farm Act supplemented program payment limits with a cap on the income farmers could earn and still receive farm program payments. Producers with adjusted gross income (AGI) of over $2.5 million, averaged over 3 years, were not eligible for payments unless more than 75 percent of AGI was from agriculture. Thus, the income cap only affected farm program participants with very high off-farm earnings both in absolute terms and relative to farm income. Despite the limits, a substantial portion of program payments continued to go to large farms and high-income farm households.
The Food, Conservation, and Energy Act of 2008 (2008 Farm Act) retains the limits on direct and counter-cyclical payments but removes the cap on marketing loan benefits. It also eliminates the three-entity rule and creates a system of "direct attribution" to match payments with a living person while making it easier for a spouse to qualify for payments. The 2008 Farm Act also eliminates the overall income cap for payment eligibility while establishing separate income caps for both farm and nonfarm income.
Provisions Overview
Payment Limits
The 2008 Farm Act retains the $40,000 limit on direct payments and the $65,000 limit on counter-cyclical payments. The limit on direct payments is reduced by 20 percent for farmers that elect to participate in the new Average Crop Revenue Election (ACRE) program. The $65,000-limit on counter-cyclical payments is increased by the same amount that the direct payment limit is reduced. The Act removes any limits on marketing loan benefits.
The 2008 Farm Act eliminates the three-entity rule and requires that payments be attributed to a living person. If a payment cannot be attributed to a living person within four levels of ownership (i.e., where a series of companies own other companies), then payments to the original entity owning the farm are reduced in proportion to the indirect ownership of the fourth level entity in the first level entity. For instance, if after tracing ownership of the entity eligible for payments, it is determined that at the fourth level of ownership, a 10-percent interest is held by an entity such as a corporation or partnership and not a person, then payments to the original entity are reduced by 10 percent.
The rule that allows a spouse to qualify for a separate limit is retained. In addition, the 2008 Farm Act treats both spouses as satisfying the active management requirement as long as one spouse provides personal labor or management.
Income Cap
Under the new income cap on payment eligibility, the overall AGI cap is dropped in favor of separate limits on the farm and nonfarm components of adjusted gross income. These new limits include two income caps applicable to nonfarm income and one applicable to farm income.
A person or entity with average adjusted gross nonfarm income in excess of $500,000 would not be eligible for direct, counter-cyclical, average crop revenue election, marketing loan gain, loan deficiency, noninsured crop assistance, milk income loss contract program, or disaster assistance payments or benefits.
A person or entity with average adjusted gross farm income in excess of $1 million would not be eligible for disaster assistance, conservation, or agricultural risk management payments unless more than two-thirds of total average AGI is farm income. The Secretary of Agriculture has the authority to waive the limitation on a case-by-case basis if it is determined that environmentally sensitive land of special significance would be protected.
A person or legal entity with average adjusted gross farm income that exceeds $750,000 would not be eligible for direct payments. Eligibility for other payments would not be affected as long as nonfarm income does not exceed the nonfarm limits.
For income cap purposes, average AGI is defined as the average adjusted gross income or a comparable measure for the 3 taxable years preceding the most recent complete taxable year. Thus, the relevant years for 2009, the first year the new limitations apply, would be 2005, 2006, and 2007. The 2008 Farm Act defines average adjusted gross nonfarm income as the residual income after deducting farm income from adjusted gross income.
Farm income is broadly defined and specifically includes income from:
- Production of crops, including raw forestry products.
- Production, feeding, rearing, or finishing of livestock.
- Production of farm-based renewable energy. The term "renewable energy" means energy derived from a wind, solar, biomass, or geothermal source; or hydrogen derived from biomass or water using wind, solar, or geothermal energy.
- Sale of farm, ranch, or forest land or land that has been used as such (including easements and development rights) and water or hunting rights and environmental benefits.
- Processing, storing, or transporting of farm, ranch, and forestry commodities.
- Rental or leasing of farm, ranch, or forestry land and equipment, including water or hunting rights.
Finally, if more than two-thirds of adjusted gross income is derived from farming, ranching, or forestry operations, then average adjusted gross farm income also includes sales of farm, ranch, and forestry equipment and income from the provision of production inputs and services to farmers, ranchers, foresters, and farm operations.
In applying the income limits, individuals filing a joint return have the option to request that income be allocated among the persons filing the joint return. The allocation is to be consistent with how the income would have been reported if separate returns had been filed.
Economic Implications
The changes with regard to payment limits should affect a relatively small share of program payment recipients and payments. Since marketing loan benefits are unlimited, the primary impact will be on direct and counter-cyclical payments for unmarried producers that previously utilized the three-entity rule to increase payments. Since over four of five payment recipients are married and average direct and counter-cyclical payments for the unmarried group averaged only $5,399 and $4,048 in 2004, respectively, few should be affected. The elimination of the three-entity rule should reduce the incentive to utilize multiple entities and complex organizational structures to maximize payments, while the direct attribution of payments to individuals rather than entities will limit opportunities to evade payment limits.
The abandonment of the overall income limit in favor of separate lower limits for the farm and nonfarm components of total income is unlikely to have a significant impact on eligibility for, or the distribution of, farm program payments. While the nonfarm limits are more restrictive, the ability to allocate income on a joint return among spouses effectively doubles the income limitations for many sources of income for payment recipients who are married. Consequently, few payment recipients with adjusted gross income below $1 million will be affected.
In addition, given the separate limits (farm/nonfarm) as opposed to an overall AGI limit, a husband and wife could have as much as $2.5 million in income ($1 million nonfarm and $1.5 million farm) and still be eligible for all farm program payments. In 2005, only 0.48 percent of farm sole proprietors and share rent landlords had an AGI above $1 million, and they received 0.87 percent of farm payments. Despite the broad definition of farm income, since over two-thirds of farmers report a farm loss and the remaining one-third report relatively low levels of farm profit, few payment recipients will be affected by the $750,000 farm income limit.
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