Commodity Program Payment Limitations and Adjusted Gross Income Limitations


Program Basics

Even though major commodity program reforms were not passed in the 2008 Farm Bill, a few changes were made to payment limitations and adjusted gross income limitations. On balance, the 2008 Farm Bill loosened payment limitation rules and tightened the adjusted gross income (AGI) test.
Payment limits were first introduced during the 1970 Farm Bill and have since been amended by subsequent Farm Bills. They place caps on the amount of subsidies any one farming operation can receive. One potentially significant provision in the new bill required USDA to write new rules to determine who is “actively engaged in farming” and thus eligible for farm program payments. A final rule was issued by USDA on January 7, 2010. The final rule left the major loopholes in place, allowing for relatively easy side-stepping of the statutory payment limits.

The AGI test for farm program eligibility was added by the 2002 Farm Bill and amended in the new bill. The AGI test establishes gross income thresholds above which individuals become ineligible for certain types of subsidies. The final rules for the AGI provisions are also contained in the January 7, 2010 final rule.

General Payment Limitations

The most dramatic change to payment limitations in the 2008 Bill was removing entirely the payment caps on marketing loan gains (MLGs) and loan deficiency payments (LDPs). The previous $75,000 per person cap (or $150,000 cap under the three-entity or spouse rules – see below) no longer exists. In low price years when loan payments kick in, it will now be possible for a single farm to receive millions of dollars in benefits without having to resort to legal loopholes or fraudulent activities.

The direct payment limitation of $40,000 per person (or $80,000 for married farmers) has not changed. Counter-cyclical payments also were retained at an annual limit of $65,000 per person (or $130,000 for married farmers).

Beginning with calendar year 2009, pulse crops (dry peas, lentils, small chickpeas, and large chickpeas) can qualify for counter-cyclical payments since they are now listed as covered commodities and will fall under the $65,000/$130,000 payment limit. Pulse crops will not be eligible for direct payments.

Three-entity and Spouse Rules

The so-called “three-entity” rule allowed a producer to receive twice the amount of farm program payments that he or she could have otherwise received by forming two additional legal entities, each of which could receive a half payment.

The three-entity rule was eliminated by the 2008 bill. As a result, as was the case before the three-entity rule was established in 1987, subsidy recipients can now receive payments through an unlimited number of legal entities. But, these payments are now directly attributed to each individual, making the number of entities formed less relevant. Each payment to an entity will be attributed proportionally to an individual who has an ownership interest. The aggregated payments attributed to an individual must not exceed the individual payment limit.

Beginning with the 2008 Farm Bill, producers or individuals with an ownership interest in an entity are required to provide either their name and Social Security number or the name and taxpayer ID number of the entity in order to trace payments back to them.

Payment caps, however, can still be doubled through the “spouse” rule. Prior to the 2008 Farm Bill, each spouse could receive payments on the same farm up to the full per person limit provided both spouses were “actively engaged” in farming (see below). Under the 2008 Farm Bill, spouses will qualify automatically for a payment just by making a significant contribution of capital, equipment, or land, which a spouse can do by owning or co-owning any of those three items. Spouses no longer need be actively engaged in farming to qualify the couple for double payments.

In the final analysis, then, the combination of the 2008 Farm Bill’s changes to the three-entity and spouse rules results in no decrease in payments for any producers with the sole exception of single, unmarried farmers whose operations previously were so large that they needed the additional legal entities necessary to use the three-entity rule to double their payments. Now, those farmers will have to resort to marriage to double their payments.

Actively Engaged in Farming

In order for an individual or entity to receive payments, he or she must be “actively engaged” in farming; this requirement is met by a farmer making a significant contribution of capital, land, equipment, and personal labor or active personal management to the farm. Landowners in share rent agreements with producers are not required to be “actively engaged” as long as their payments are directly associated with the risk of the crop being produced.

Under current rules, the personal labor test is numerical and quantifiable – 1000 hours of work annually or 50 percent of the commensurate share of the required labor. The management test however is vague, subjective, and essentially meaningless. This “management” loophole has led to the development of an entire payment limitation loophole industry to create pass-through payments from absentee partners and investors who are not in reality engaged in farming.

The new farm bill does two things with respect to actively engaged in farming rules. First, it enables spouses to automatically qualify as actively engaged even if they do not contribute to labor and management of the farm (see spouse rule section above). Second, it requires USDA to rewrite the regulations governing actively engaged in farming rules.

With that second directive, the Administration could have decided to require an objective and quantifiable test for management and to tighten up other aspects of the regulations, and thus greatly reduce the opportunities for payment abuse. However, the new law did not dictate how USDA should change the rules. The final rule does include one modest step toward reform by requiring that farm management must be contributed on a “regular and substantial” and “documented” basis. But the final rule kept the standard vague and subjective. In essence, then the Administration choose the status quo over reform.

Payment Limits and the New ACRE Program

A new Average Crop Revenue Election (ACRE) program was introduced in Section 1105 of the 2008 Farm Bill. Under ACRE, farmers have the option of enrolling in a revenue-based program as an alternative to receiving counter-cyclical payments. The farmers must also take a 20% reduction in direct payments, which is limited to $32,000 (or $64,000 using the spouse rule), and a 30% reduction in marketing assistance loan rates which are no longer capped. ACRE payments count toward the $65,000 a person or $130,000 a couple counter-cyclical payment limit.

ACRE payments are triggered when actual farm revenue is below the benchmark farm revenue. Actual State revenue for each commodity must also be lower than the ACRE program guaranteed revenue for each crop year. ACRE payments will be made on 83.3% of program base acres planted to covered commodities in 2009, 2010 and 2011 and 85% of planted base acres in 2012.

Adjusted Gross Income (AGI) Test

The 2002 Farm Bill denied commodity and conservation payments to producers with an AGI of more than $2.5 million unless 75 percent or more of the income was from farming, forestry, or agriculture. In many instances, that limit could be doubled to $5 million for married couples, whether or not they filed separate tax returns.

The 2008 Farm Bill continues with the same basic approach with respect to conservation payments, but makes major changes with respect to commodity payments.

Conservation benefits are now denied to producers with an AGI of more than $1 million ($2 million for most married couples) unless at least two-thirds of the total AGI is adjusted gross farm income, in which case there is no limitation.

The 2008 bill denies commodity payments (direct, counter-cyclical, ACRE, marketing loans or LDP, milk income loss contract, and disaster payments) to individuals if they have an adjusted gross income of more than $500,000 (or, in many instances, $1 million for a married couple), even if more than 75% of their overall income is from farming, forestry, or agriculture.
In addition, the 2008 bill denies direct payments to an individual with over $750,000 (or, in many instances, $1.5 million for a married couple) in adjusted gross farm income. In this case, though, all other forms of payments and benefits other than direct payments would be unaffected.

In each case, income is averaged over a three-year period. Under the new rules, very wealthy married landowners with large farm and non-farm assets could theoretically have combined gross incomes as high as $2.5 million with no ineligibility.

Legislative Authority

Payment Limitation Amendment and ACRE Payment Establishment: Section 1603(b) of the Food, Conservation, and Energy Act (FCEA) of 2008 amends Section 1001 of the Food Security Act of 1985, to be codified at 7 U.S.C. Section 1308.

Repeal of Three-Entity Rule: Section 1603(c) of the Food, Conservation, and Energy Act (FCEA) of 2008 amends Section 1001A of the Food Security Act of 1985, to be codified at 7 U.S.C. Section 1308-1.

Actively Engaged in Farming Amendment: Section 1603(d) of the Food, Conservation, and Energy Act (FCEA) of 2008 amends Section 1001A of the Food Security Act of 1985, to be codified at 7 U.S.C. Section 1308-1(b).
Adjusted Gross Income (AGI) Amendment: Section 1604 of the Food, Conservation, and Energy Act (FCEA) of 2008 amends Section1001D of the Food Security Act of 1985, to be codified at 7 U.S.C. Section 1308-3a.

Funding

The estimated total commodity program spending over the next four years is in the table below. The total includes estimates for direct payments, counter-cyclical payments, ACRE, and marketing loan gains (loan deficiency payments). These estimates will fluctuate depending on the market prices for various commodities covered by the program (e.g. cotton, rice, corn, soybeans, wheat, etc.)

Estimated Total Commodity Program Spending

2008

2009

2010

2011

2012

$8.2 B

$8.2 B

$7.7 B

$7.5 B

$6.4 B

Implementation Basics

Changes to payment limitation and adjusted gross income rules were issued as an interim final rule on December 28, 2008. The interim final rule changes are effective starting the day they were issued for the 2009 crop year. The final rule was then issued on January 7, 2010.

Additional Resources

The Farm Service Agency is the agency within the USDA responsible for administering and managing commodity programs, through a network of federal, state, and county offices.

For more information about the commodity programs, visit the FSA website