2021 farm program review

Paul

Neiffer: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count. Here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we want to have a quick conversation here with Paul Niefer, and we're going to have a conversation here around the farm program. So Paul, another quick introduction and then we'll get started on the farm program.

Paul

Neiffer: Yeah, again, I'm Paul Niefer. I'm a CPA principal with the firm CliftonLarsonAllen. Also write a column for Top Producer called FarmCPA, do a blog called farmcpatoday.com. Can't believe it, Chris, I almost started that 12 years ago.

Chris

Barron: Time flies.

Paul

Neiffer: Time sort of flies when you're having fun. Yeah, when you're having fun, I guess. But that's a quick intro on myself. I think most everybody out there knows who I am, but just in case, Yeah, there's a quick intro.

Chris

Barron: Awesome, appreciate it. So what I want to do is just have a brief conversation, you know, New Farm Program, probably some changes with it. Looks like a different administration, different leadership, some changes going on. What are you seeing for guidance for New Farm Program?

Paul

Neiffer: Yeah, you know, I think, I think you're right. I think the new administration coming in is going to focus more in on SNAP and those type of programs related to the USDA and Farm Bill, you know, depending on who we get that's going to be the head of it. You know, we've heard 4 or 5 names. I'll leave it up to Jim Wiesmeyer to go through all those, but I think the ability for farmers to expect large payments such as MFP and CFAP with the new administration probably is not as likely as we've seen with the current or the outgoing administration. So I think that's sort of my two cents on what we might see going forward with farm programs.

Chris

Barron: So what specific guidance are you seeing? I mean, what, you know, there was some initial stuff I know out in August and then some changes since then. So what are you seeing or hearing specifically?

Paul

Neiffer: Yeah, Yeah, back in August, it was funny, on August 8th, and I think I was on RFD-TV the following day, there was an announcement that came out that USDA says, hey, we're tightening up the rules on people being allowed to qualify for a payment based on management. They had tightened up those rules back in the 2014 Farm Bill, but it didn't apply to family farm operations. Well, the guidance that they came out with back then said in order to qualify as a manager, you had to provide at least 25% of total management for the farm operation, or you had to provide at least 500 hours of management time. And that was going to be tough for a lot of our larger family farm operations where, let's say, somebody lives in Denver or in Des Moines or in Minneapolis and the farm operation is in Iowa or Kentucky, wherever it might be.

And so the August 8th announcement came out and it was sort of a surprise. I remember when I was on RFD-TV that Senator Grassley, your senator in Iowa there, came on. He thought this was great news because he's always been a firm proponent that only farmers with dirt under their fingernails, that's sort of his quote, should be allowed to qualify for a farm payment. So that was catching us off guard. I had posted in the blog a couple times. And I think because of that and a few other behind-the-scenes politicking, USDA finally came out about a week ago, two weeks ago, and reversed that and said, 'Oh, sorry, we goofed up.

We're not going to make that applicable for family farm operations.' So they're still under the old guidance, and under the old guidance, all they have to do in order to qualify for a payment that family member, all they have to do is provide management critical to the farm operation. Well, that's a very subjective test. If I go ahead and, and, you know, do the marketing for the farm, that's probably critical. If I do the crop insurance duties, that's critical to the farm operation. If I simply am in charge of risk management or I do hedging, whatever it might be, those are all critical to the family family farm. So that means those family farms that let's say they had 10 or 15 members, owners of that farm, and under the old rules that qualified all 10 or 15 members for payments, and they have a large enough farm, so they got those payments. Well, that was going to be restricted.

Now it's back to the old rules, it's relaxed, so they're going to be okay.

Chris

Barron: So to define active, so you're talking about actively engaged Is that correct?

Paul

Neiffer: Correct.

Chris

Barron: You know, so that's kind of the terminology they use. And so in order to be actively engaged, for example, we have a number of clients that we work with that have family members that, as you say, are off-site, um, the majority of the year. But I can think of 2 or 3 just off the top of my head that, um, those off-site family members show up, you know, quarterly for a day or 2 meeting on specific decision-making for the overall farm. They're on the advisory board. They're key in overall business decision-making, but they're not going to nearly get the hours that you're talking about. So under these current guidelines that have been— that were revised and revised again, it sounds like— are, are basically fine again as far as the rules look?

Paul

Neiffer: Yeah, yeah, yeah. If they qualified under their old rules, they're going to qualify under the new rules, because what happened is the old rules were were eliminated and then the elimination was eliminated, so to speak. So you're back to the old rules. So as long as you qualified under the old rules, you're going to qualify under the new rules.

Chris

Barron: Okay, good. So talk a little bit about the, the rules with— so we had CFAP, um, kind of a not really a typical deal this year that we had, and, and how that applies to some of the, the AGI and how that looks with WIP and everything else that's being paid out.

Paul

Neiffer: Yeah, so, so what had happened with CFAP is that because of the large-scale payments that are going to be paid out, I mean, we're seeing payments for some farm operations, $2 or $3 or $4 million. Well, if they're structured as an LLC or a corporation, under the old rules for all other farm programs, they'd only been entitled to one $250,000 payment. Doesn't matter if they had 10 owners, didn't matter if they have 1 owner, they're gonna get stuck with a $250,000 payment. Well, the original CFAP number 1 came out, instead of being stuck with 1 payment, it said that as long as you have 3 people working at least 400 hours, we're gonna grant you up to $750,000. So instead of being $250,000, now it's $750,000. But you're still subject to the ownership rules.

So if you had, let's say you had an LLC, where one person had 98% of the ownership and the other two people only had 1% of the ownership instead of— and they qualified for at least $750,000. Instead of getting paid $750,000, they actually only got paid about $265,000 because the one guy that has 98%, he's going to get $250,000. Then the other two that only have 1%, they're going to get $7,500 each. So they only qualify for $265,000. Now CFAP number 2 comes along and it indicates, well, as long as you still have at least 3 owners that are working in the fam— in that farm operation at least 400 hours, you're not going to qualify for up to $750,000. We don't care what the ownership is. Again, in my example of 98, 1, and 1, even though there's 2 of them that only have 1%, now the entity is going to qualify for $750,000. Of payments. So that was good news.

They, they definitely loosened up the rules. And like I said, I've seen a lot of out in our area with the fruit guys and the dairy guys and so on. I mean, we're seeing easily that $750,000 is getting hit fairly often out in our area. Now there's another provision that indicated if your AGI is over $900,000— remember, the rules are you automatically qualify for a payment if you're under $900,000 of adjusted gross income— and that is based on a 3-year average for 2016, '17, and '18. So when you're in 2020, you skip the previous year and then you go back to 3 years before that. But if your AGI was over that number for CPAP— and we'll talk about WIP+ here in a second— but for CPAP, you automatically then could qualify for the payment if your income was over $900,000 and more than 75% of it was from farm operations.

Now that same, same time period where they came out with the guidance related to management, they actually came out with additional guidance indicating that wages now qualify as farm income as long as it's paid from a farm operation. And then on a slightly very— doesn't apply to too many operations, but I see this— dividend income would also qualify. So that was good news, but a lot of our farm operations, they'll have a Schedule F that has a loss, and then they have equipment sales over on 4797 that really is related to farming. But according to the rules that FSA has, those equipment sales don't qualify as farm income unless more than two-thirds of your income is from farming. So it's quirky. How they do it.

So a lot of people are thinking, well, I'm over $900,000, I know that more than 75% of my income is from farming, but then when you go through the rules, ends up that they aren't, or the entity easily qualifies, but then each individual owner also has to qualify. So that, that also can, can mess them up. And then certainly over on the WIP+, that'll probably be the last one unless you got a couple other topics you want to go over. But over in the WIP+, They have a provision that indicates that if more than 75% of your income is from farming, doesn't matter what your AGI is, but if at least 75% of your income is from farming, then instead of qualifying for $125,000 payment, you actually now will qualify for $250,000.

But again, for a lot of our farmers, that could be tough for them to qualify because they're automatically thinking, well, you know, all my income is from farming, my gross income is from farming. Well, this is not gross income. This is AGI, so it's net Schedule F income. And then one spouse has got $100,000 wage that they get in town from a job. That's gonna mess them up. So if you thought they're gonna qualify for $125,000, I mean for $250,000, they're stuck with the $125,000. So I've seen several of those where we've gotten emails or calls where they're just not gonna qualify 'cause their AGI, there's nowhere, I mean they have a loss. They have a farm loss. Once you have a farm loss, you can never— even if you have $2 of interest income, you could never qualify for the more than 75%.

Chris

Barron: Gotcha. Okay, that's all. Um, the good thing is none of that's confusing. I'm just kidding.

Paul

Neiffer: But you know, that's, that's, that's why I think each individual situation really has to sit down and, and really go through this and look and, you know, yeah, if, if you are a moderate-sized farm operation, let's say in the Midwest, if you're in that 6,000 to 10,000 acres that you're farming, whether it's own ground or cash rent ground, and you're structuring your structure incorrectly, you likely are causing you to miss out on some payment limits. So it's very— you got to be very careful. Or if you think you're going to grow into that size, then you definitely need to be, you know, talking with somebody like myself that can go through, okay, here's your options. Here's what you got to watch out for. That's right. As we've seen with CPAP, you know, some of these people lost out on quite a bit of farm program payments.

Chris

Barron: Right. So one of the things I do want to hit on real quick, because it does affect probably a fair amount of listeners on here that we are currently working with, on business structure and how that relates. We talked about that in a prior podcast on some tax information, but I want to bring this up with regard to the farm program specifically quickly, that, you know, we have a lot of producers that have machinery and equipment company, they have a trucking company, and then they may have 2 or 3 operating entities within that family. And that family or that collaborative group, you know, whether it's a collaboration of a couple of farmers or, or it is legitimately family members, all utilizing machinery from that equipment company, we've helped a lot of operations structure that as its own profit center, as its own business entity, for a couple of reasons.

Again, liability is one, but primarily so that we know exactly what our cost of production is for machinery and equipment, and then everybody can benefit from being a little more uniform in how they structure, and it makes it a lot easier to transition down the road and all. There's a whole bunch of benefits anyway. What I want to ask you is, when, when we put that together and the FSA office looks at it and says, well, how are you actively engaged here? Is there any advice on, on the best way to approach the FSA office to make sure that they clearly understand that, you know, we have one line of equipment for these 4 or 5 entities and we are legitimately farming together? Is there a right or wrong way to approach that with the FSA office?— with regard to their rules?

Paul

Neiffer: Yeah, what you find when you're dealing with them, and what I find with FSA is each office has their own set of rules. I mean, there's sort of the master rules, but some offices interpret them a little differently. So it's important to make sure that you present before you sign anything or before you structure anything, is come up with your structure. Hopefully it's done correctly, but then review with the local FSA office and have them bless it one way or another. Either yes, you're going to be fine, or no, this isn't going to work. Now, they're not necessarily going to tell you how to fix it, but they're at least going to let you know whether it works or not. Yeah, so it's important if you're a farm operation and you're renting equipment or you're getting custom services, you know, you need to structure it one way.

If you're having debt where you have the Farm LLC and you got the farm operation, you could Equipment LLC and they're all cross-collateralized. That can mess up you getting what we call left-hand capital contribution or equipment contribution or land contribution. So I probably can't tell you what to do in a podcast like this because every situation is going to be a little bit different, but you just got to make sure you understand how those rules affect your farm operation when you're dealing with the FSA office.

Chris

Barron: I think the key to that message is communicate, communicate, communicate with your local county office so that they understand what you're up to and what you're doing. I mean, firsthand experience in our, our county, you know, we've had to, you know, go in and explain because if you're, you know, if you're using one line of equipment, there's just a lot of independent producers out here yet that haven't gone down that path, that haven't ran into that yet. But on the same token, we have a lot of producers that I'm sure are listening to this podcast too that have structured some things, and we need to make sure we're doing a good job communicating at the FSA office for sure that we are legitimately actively engaged.

And then the last part of this question too for you, Paul, is sometimes we hear the questions of defining actively engaged, and I've heard from some county offices, well, Are you actively engaged in all areas of the business? Well, no, I primarily am, you know, working in the shop, or I primarily work in the office, or I primarily work in this, that, or the other area of the business. So what you told me at the beginning, just to make sure that I clearly understand, it shouldn't really matter if we're working in a specific function of the business, because if there's, you know, 10 people in the family operation and each person has a specific role and they pretty much stay in that role that defines them as actively engaged.

Paul

Neiffer: Yeah, right. As long as they're providing management services critical, you know, without that service being provided by that person, the farm wouldn't operate very well, wouldn't be efficient, and so on, then they're going to qualify. And you're correct, if you're not out there with dirt under your fingernails for more than 1,000 hours a year, then the local FSA office wants a little bit more guidance as to how you really are meeting that active and engaged definition.

Chris

Barron: Because I, I can think of a specific operation where, you know, the individual's managing the grain facility in the fall but does all the marketing and does all the office management. So they're getting dirt under their fingernails in the office a lot of the time but are still legitimately, you know, because if they weren't doing that part, there The people that are out in the shop and that are, you know, driving the tractors around, doing all that other stuff, wouldn't be getting those things done either. So, you know, it's just making sure that it's legit.

Paul

Neiffer: Well, and as your operations get larger, you can't afford to be on the combine or can't afford to be on the tractor. You're now a logistics manager. Right. I mean, you're more important than almost anybody else is. But yeah, you're not physically out there, you know, toiling in the dirt, so to speak. Right. So, but you're just as valuable or more valuable than any other person in that operation.

Chris

Barron: Right, right. Well, and again, I think the moral of the story is communicate with the FSA office and, you know, go in and explain exactly what the business entities are doing and why. And like I said, if they have an issue with that, then, then you can adjust and, and, or they can agree. So anything else I didn't ask exactly on the topic of farm program that's we're going to probably be dealing with? And I'm sure there'll be follow-ups to this as more and more information comes out.

Paul

Neiffer: Nope, no, I think, I think you covered it.

Chris

Barron: All right, well, I think you covered it actually. I'm just the question asker here, so—

Paul

Neiffer: well, maybe that's a more appropriate way of saying it. Yeah, yeah, we covered it. Yeah, but we covered it.

Chris

Barron: There you go. So, all right, hey Paul, thanks again for everything. If anybody wants to reach out to you with questions, that's the best way to do that?

Paul

Neiffer: Yeah, either give me a call on my cell phone, 509 9739, or you can call my direct line, 509-823-2920, or you can reach me via email, paul.neiffer@claconnect.com, or go to our blog, farmcpatoday.com, and you can see my contact information there too.

Chris

Barron: Awesome. Hey Paul, thanks a lot again. Really appreciate it.

Paul

Neiffer: No problem. Thanks, Chris.

Chris

Barron: You bet. And thanks everybody for listening. We will catch you again next time on the Ag View Pitch.