Various farm programs as established by the Farm Service Agency have various limits based on the farmer’s adjusted gross income (AGI). However, some of these programs also allow for either a double payment amount or an increase in the payment limit.
For example, the Emergency Relief Programs allowed for an increased payment limit if more than 75% of your AGI is from farming. Remember, AGI is income after expenses. Most farms now have a fair number of farm equipment trades, and they usually show net gains on Form 4797 and a net loss on Schedule F.
Are farmers allowed to net those two items and show net income from farming? The answer is it depends.
If other farm AGI is greater than two-thirds of total AGI, the farmer is allowed to include those equipment gains as part of farm income. Most farmers are not able to meet that definition.
USDA Versus IRS Farm Income Definitions
Our understanding is that USDA has this rule because the IRS does not consider equipment gains to be farm income. However, the IRS changed the rule a few years ago as a result of the Tax Cuts and Jobs Act and now automatically considers equipment gains to be farm income. We hope USDA will update their AGI rules to reflect this.
There are many sources of income that USDA considers to be farm income that the IRS does not. Some of them are:
- Cash rent income
- Gains on selling farmland
- Processing, storing and transporting farm goods
- Income from renewable energy
These items are not farm income for IRS purposes, but they are according to USDA.
One good change is the new economic aid package that was passed at the end of 2024 allows for a higher payment limit if 75% of your gross income is from farming and not based on AGI. Gross income is primarily your sales of ag products without any reduction for farm expenses. However, if you purchase ag products to resell, you likely will need to reduce your income by those costs.
Because it is based on sales and not AGI, it is going to be much easier for a farmer to be a “farmer” under this requirement. Even having equipment gains not treated as farm income might not hurt the farmer.
An Example
Roxanne has an average sale of farm products of $2 million. She has equipment gains of $400,000 and other non-farm income of $50,000. Her farm gross revenue is 81.6% of total revenue. She qualifies as a farmer. If equipment gains are treated as farm income, her farm percentage would increase to 98%.
Gross income is an average of 2020 to 2022 items on your income tax return. However, we must wait on USDA for regulations to determine what they consider to be farm income. Either way, gross revenue is much easier for the farmer to be a “farmer” than AGI.
