For FSA Purposes, Cousins Are No Longer Family

October 10, 2017 06:24 PM
 
For FSA Purposes, Cousins Are No Longer Family

Most larger family farms have been structured as a partnership for FSA payment-limitation purposes. As a partnership or joint venture, there is no payment limit at the partnership level, but there is a limit for each partner.

Each partner must provide sufficient active labor or active management. Many of our farm families are getting fewer and fewer owners active in the farm operation. They might still qualify for FSA payments because of their active personal management. But unlimited owners qualifying via active management is now only available to family farm operations.

For example, ABC Partnership has eight equal partners and generates $800,000 of Agriculture Risk Coverage-County (ARC-CO) or Price Loss Coverage (PLC) payments each year. Each partner has a $125,000 payment limit. This equals a total payment limit of $1 million. Because the total payments earned are under this amount, there will be no payment limit.

However, the 2014 farm bill enacted new limits for non-family farms. If a farm includes any non-family members, FSA no longer considers it a family farm.

Cousin Criteria. As long as each person links to another family member within the partnership, the operation continues to qualify as a family farm. But if you have cousins at the top layer of ownership, you are no longer a family farm and the number of owners that can qualify via active management is limited. In this case, the business is subject to the new manager rules and must document actions of the partners who make significant contributions of management. This contribution must be 500 hours of actual management time; a combination of active personnel management and personal labor that equals at least 550 hours (if management is more than labor); 950 hours (if labor is more than management); or 25% of total management time.

Managers are required to maintain records of their management services for the farm operation. The log must chronicle all activities performed, the location where the activities were performed and the time spent on each.

Duties must fall under one of these categories:

• Capital, land and safety-net programs: Arranging financing, managing capital, acquiring equipment, negotiating land acquisitions and leases, and managing insurance or USDA program participation.

• Labor: Hiring and managing workers.

• Agronomics and marketing: Deciding which crops to plant, purchasing inputs, managing crops, pricing crops and marketing crops or futures.

Passive activities such as attending board meetings do not count and neither does bookkeeping.

The Qualifications. Managers in a non-family partnership are entitled to one payment limit and cannot qualify more than three managers.

Let’s return to the ABC Partnership example. It’s over 2,500 acres, so it can qualify two managers. If it is considered complex, it can qualify three managers. This could limit farm-program payments to either $250,000 or $375,000, respectively.

If you fall under these rules, the best choice is to split the farm into new farm partnerships composed strictly of family members. If every owner works at least 1,000 hours in the farm operation, then the new limits will not apply even if it is not a family farm.

 

How the Farm Bill Redefines Relatives

The 2014 farm bill changes how FSA defines family-farm operations. These guidelines can help you determine if your farm should adjust its partnership structure to qualify for federal payments.

Family members include:

• a lineal ancestor (father, mother, grandfather, grandmother, etc.)

• a lineal descendent (son, daughter, grandson, granddaughter, etc.)

• a sibling (brother or sister)

• a spouse to any of the above

Family members do not include:

• cousins

• nieces or nephews

• aunts or uncles

 

Paul Neiffer is a tax principal with CliftonLarsonAllen and author of the blog, The Farm CPA. He recently purchased a 185-acre farm. Driving his cousin’s combine is his idea of a vacation.

 

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