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Payment and AGI Limitations

Published on: 13:17PM Oct 04, 2018

We continue to get several questions regarding either the payment or Adjusted Gross Income (AGI) limits regarding the new Market Facilitation Program (MFP).  This program will make certain payments to growers due to losses related to the tariffs, etc.  The biggest beneficiaries are soybeans, dairy and hogs (at least for now).

However, this program is subject to certain payment or AGI limitations.  First, there is an overall payment limit of $125,000.  One limit related to non-livestock and one related to the livestock payments.  Therefore, an entity that is growing soybeans and raising hogs could apply and receive up to $250,000 in payments (plus any related spouse payments).  

At the Entity Level

If the entity is not a general partnership (GP) or joint venture (JV), there will be one payment limit at the entity level.  If it is a GP or JV, there is no payment limit.

There is also an AGI limit at the entity level (except none for GP or JV).  The limit is $900,000 of average AGI during 2014-2016.  For S corporations, AGI is calculated as line 1 on Schedule K (0rdinary income) minus Section 179.  For LLCs taxed as partnerships, the AGI limit is Schedule K Line 1 (ordinary income) plus Line 4 (guaranteed payments) minus Section 179.  For a regular corporation, it is taxable income on page 1 of 1120 plus charitable contributions.  For a GP or JV, there is no limit.  It then drops down to the owner level.  Remember that a GP can elect to be taxed as a C corporation.

At the Owner Level

If the entity's AGI is under $900,000, then you must drop down to each owner.  If all of the owners are under $900,000, then the entity will qualify for full payments.  If one or more owners is over the limit, then their respective share of payments are disallowed to the entity.  However, if an married owner is over the limit, but would be under if they had filed a separate return, the FSA allows a CPA to write a letter explaining what the AGI would have been in that case.  If this AGI is under the $900,000 limit, then the payment will be allowed.

Examples

ABC, a general partnership, qualifies for $500,000 of MFP payments.  The partnership has four equal owners.  Since this is a GP, there is no payment limit at the GP level.  We drop to the partners and as long as their AGI is less than $900,000, than all $500,000 in payments is allowed.  

However, let's assume that two of the partners are over the AGI limit.  In this case, the partnership would only qualify for $250,000.

Now let's assume this is an LLC.  Since it is a limited liability entity, the payment is capped at $125,000.  As long as the owners are under $900,000, then the full $125,000 will be allowed (but it now longer qualifies for $500,000).

Now let's assume that the two partners are over the AGI limit.  In this case, ABC would only qualify for $62,500.

The FSA can track ownership up to four levels.  The new farm bill proposal  by the House would treat corporations and LLC, LPs, LLPs, etc. the same as a GP, but that provision has not been put into law yet (and may not end up in law).

As you can see, having the right structure for tax purposes can cost you a lot of money when it comes to FSA payments.  Make sure your structure is right for your operation.