USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)

Overview

The Extending Government Funding and Delivering Emergency Assistance Act (P.L. 117-43) (Act) was signed into law on September 30, 2021.  The Act includes $10 billion for farmers impacted by weather disasters during calendar years 2020 and 2021.  $750 million is to be directed to provide assistance to livestock producers for losses incurred due to drought or wildfires in calendar year 2021 (the Emergency Livestock Relief Program – (ELRP)).

USDA continues to release information about the ERP.  One bit of information came out last week and it involved the question of whether income from the sale of farm equipment counted as farm income for purposes of the ERP.  It was not the answer we were hoping for.

The ERP and the definition of farm income (among other aspects of the program) – it’s the topic of today’s post.

In General

Livestock provisions.  To receive a Phase 1 payment, a livestock producer must have suffered grazing losses in a county rated by the U.S. Drought Monitor as having a severe drought) for eight consecutive weeks or at least extreme drought during the 2021 calendar year been approved for the 2021 Livestock Forage Relief Program (LFP). Those who would have normally grazed on federal but couldn’t be due to drought are eligible for a Phase 1 payment if they were approved for a 2021 LFP.  Various FSA Forms will need to be submitted. 

ELRP Payment Calculation – Phase One

Payments are based on livestock inventories and drought-affected forage acreage or restricted animal units and grazing days due to wildfire reported on Form 2021 CCC-853.  A payment will equal the producer’s gross 2021 LFP calculated payment multiplied by 75% and will be subject to the $125,000 payment limitation. 

Crop insurance (or NAP) requirement.  In late 2021, the USDA provided some guidance to producers impacted by various weather-related events.  The former Wildfire and Hurricane Indemnity Program (WHIP+) was retooled and renamed as the ERP.  ERP will have two payments – two phases.  Phase 1 is presently underway, and Phase 2 may not happen until 2023.  ERP payments may be made to a producer with a crop eligible for crop insurance or noninsurance crop disaster assistance (NAP) that is subject to a qualifying disaster (which is defined broadly) and received a payment.  Droughts (a type of qualifying disaster) are rated in accordance with the U.S. Drought Monitor, where the qualifying counties can be found.

To reiterate, an ERP payment will not be made to any producer that didn’t receive a crop insurance or NAP payment in 2020 or 2021.  Because of this requirement, crop insurance premiums that an ERP recipient has paid will be reimbursed by recalculating the ERP payment based on the ERP payment rate of 85 percent and then backing out the crop insurance payment based on coverage level.     

In addition, the ERP requires that the producer receiving a payment obtain either NAP or crop insurance for the next crop years.  Also, a producer that received prevented planting payments can qualify for Phase 1 payments based on elected coverage. 

Note:  ERP payments are for damages occurring in 2020 and 2021 – so they are not deferable. 

Computation of Payment and Limits

Once a producer submits their data to the FSA, an ERP application will be sent out for the producer to verify.  Applications started going out to producers in late May.  An ERP payment replaces the producer’s elected crop insurance coverage.  It’s based on a percentage with the total indemnity paid using the recalculated ERP percentage with any crop insurance or NAP payment subtracted. 

Payment limit.  The ERP payment limit is $125,000 for specialty crops.  For all other crops, its $125,000 combined.  However, for an applicant with “average farm adjusted gross income” (average AGI) based on the immediate three prior years but skipping the first year back that is comprised of more than 75 percent from farming activities, the normally applicable $900,000 AGI limit is dropped, and the payment limit goes to $900,000 for specialty crops and $250,000 for all other crops.  There is separate payment limit for each of 2020 and 2021. 

Note:  ERP payments for “historically underserved producers” will be enhanced by an extra 15 percent.  Such producers include beginning farmers, veterans and “socially disadvantaged producers.”

Definition of farm income.  Farm income for ERP purposes includes net Schedule F income; pass-through income from farming activities; wages from a farming entity; IC-DISC income from an entity that materially participates in farming (has a majority of gross receipts from farming).  Also counting as farm income for ERP purposes is income from packing, storing, processing, transporting and shedding of farm products.  Gains from the sale of farm equipment count if farm income is at least two-thirds of overall AGI (excluding gains from equipment sales and the sale of farm inputs). 

Note:  Under the Tax Cuts and Jobs Act (TCJA) for tax years after 2017, a “trade-in” of farm equipment is treated as a sale that is reported on Form 4797.  As a result, many farmers may have little income reported on Schedule F for a tax year that they incurred a large gain from “trading in” farm equipment that is reported on Form 4797.  This could cause such a farmer to not receive an additional ERP payment. 

It is likely that the same rule will apply to income from custom farming or harvesting services as well as income derived from providing seed to farmers (offset by allocated expenses). 

Average AGI is “comparable to the net income from farming and related operations.”  FSA Handbook, 6-PL. This requires a determination of what qualifies as gross farm income from which net income from farming operations, or average AGI, can be derived.

Note:  Loss years can be used in the AGI calculation.  If negative farm AGI is greater than total negative AGI by at least 75 percent, the farmer qualifies.  In addition, the three-year computation is simply the applicant’s net income from farming compared with all of the applicant’s other sources of income as reported on the tax return. 

If an enhanced payment limit is sought on behalf of an entity, “all members of the entity must complete Form FSA-510 and provide the required certification according to their direct attributions of 7 C.F.R. 1400.105.”  This requires that the each of entity owners, up to four levels, also satisfy the more than 75 percent test.  For this purpose, wages the entity pays counts as farm income.  If one or more owners fails to satisfy the test, the extra payment limit is reduced by the disqualified owner(s) share(s), but there is no reduction to the original payment limit.  Wages and dividends paid by a materially participating farm corporation qualifies as farm income.  For this purpose, a materially participating farm corporation is one with more than 50 percent of gross receipts from farming.  If an entity has not been in existence for the three years for which average AGI is computed, AGI from processor entities can be used. 

Example:  Able Farm Co. is eligible for $300,000 of ERP related to crop insurance proceeds on account of drought damage to the farm’s 2021 wheat crop.  All of Able Farm Co.’s income is derived from farming.  Able Farm Co. is eligible for an original payment limit of $125,000 of ERP payments and could receive another $175,000 of the $250,000 additional payment limit depending on the facts.  Assume that Able Farm Co. has four shareholders.  Two of the shareholders that own 50 percent of Able Farm Co. actively farm and receive wages and dividends from the company.  They also rent land to the corporation.  Assume that their farm income meets the 75 percent of overall AGI test.  Conversely, the other two shareholders that also own 50 percent of Able Farm Co. are not involved in Able Farm Co.’s farming operations, have off-farm wages, and don’t satisfy the 75 percent test.  Their failure to meet the 75 percent test individually means that the additional $250,000 payment will be reduced by 50 percent ($250,000 - $125,000 = $125,000.  Thus, Able Farm Co. will receive $250,000 of ERP payments ($125,000 + $125,000). 

Example:  SunGro Cherry Farm qualifies for $950,000 of ERP because of weather damage to its cherry crop.  SunGro is owned equally by four owners, two of which meet the 75 percent test.  SunGro is eligible for the original payment limit of $125,000 and an additional payment limit of $775,000 ($900,000 - $125,000).  But, the additional payment limit must be reduced by the 50 percent ownership of the shareholders that don’t meet the 75 percent test.  Thus, the total ERP payment that SunGro Cherry Farm will receive is $125,000 + (.5 x $775,000) = $512,500.    

Certification.  To get the enhanced payment limit, a CPA or attorney must prepare a letter to be submitted with Form FSA-510 certifying that the applicant’s AGI is over the 75 percent threshold.  The FSA has a Form letter than can be used for this that is contained in its Handbook.  The FSA 6-PL, Apr. 29, 2022, Para. 489 discusses the 75 percent test and pages 8-73 through 8-74 is where the sample letter is located.  The “certification” may allow married farmers to eliminate the off-farm income of a spouse and make it possible to meet the 75 percent test if it otherwise would not be met.

Note:  An attorney may sign Form FSA-510, but a CPA should write the letter that FSA provides in the FSA Handbook, 6-P, pages 8-73 and 8-74. 

 Conclusion

The ERP is complicated and has a non-accounting measure of AGI in certain situations.  In addition, the exclusion of gains from equipment “trades” does not take into account the TCJA change on the matter.  Close monitoring of the USDA/FSA website and amendments to the 6-PL is a must.