Why You Need to Understand Adjusted Gross Income

Adjusted gross income (AGI) is an income tax calculation based on how income is reported on your income tax return. A farmer who files a Form 1040 can easily find AGI since it is a line item on the income tax return.

But for farm operations that file as a corporation or partnership, it is a little tougher to determine the financial metric. 

Farm program payments are usually subject to an overall AGI limit. However, in some cases, a farmer can receive an extra payment if their farm AGI is more than 75% of overall AGI. Recently, FSA enacted the Emergency Relief Program (ERP), which allows farmers an extra payment limit if they meet this requirement.

KNOW THE LIMITS

Let’s review the limit on AGI and how that applies. First, if the farm operation is any type of legal protection entity, such as a corporation or LLC, then both the entity and all owners of the entity must be under the AGI limit. 

In most cases, this is currently $900,000. If you exceed the limit, by even $1, you cannot receive any payments. If some or all the owners of the entity exceed the limit, then their share is not allowed to the entity.

Married farmers who file a joint return and exceed the limit can have a CPA or attorney write a letter to FSA indicating if the farmer had filed separately, they would be under the limit. You are not required to file a separate return.

This means if all property is held and reported by each spouse 50/50, the AGI limit is effectively increased to $1.8 million instead of $900,000.

The limit is based on an average three-year period excluding the most recent prior year. For example, 2022 AGI calculations are based on AGI for 2018 to 2020. This is when AGI is bad.

THE GOOD SIDE OF AGI

Now let’s dive into when it is good. If the farmer can show more than 75% of his or her AGI is from farming, then ERP and some other programs allow an increase in payments. 

While that is good, the bad news is FSA does not write tax laws and really has not done a great job of keeping up with tax-law changes (especially the tax reform passed in 2017).

They continue to use definitions and formulas that are 20 years old. AGI limits were first enacted with the 2002 farm bill. That limit was $2.5 million unless at least 75% was from farming when there was no limit. The 2008 farm bill then indicated you could have $500,000 of non-farm AGI and $750,000 of farm AGI. 
However, the 2014 farm bill simply used a $900,000 AGI limit, which the 2018 farm bill continued. 

This means the FSA handbooks do not match current tax laws, and it is a challenge to reconcile tax rules and FSA rules when determining farm AGI.  

The Farm CPA Podcast

As you prepare for lots of cab time this fall, be sure to add “The Farm CPA Podcast,” brought to you by Top Producer, to your queue. Each week Paul Neiffer visits with business-minded farmers and ag experts for lively conversations.

DAN BASSE, president and CEO of AgResource Company
“U.S. farmland acreage is at the lowest since 1909. I describe this as ‘peak farmland.’ The U.S. has kind of maxed out, unless we dip into CRP, which isn’t likely.”

CURT COVINGTON, senior director of institution credit at AgAmerica Lending
“Farmers really struggle with anticipating the needs for better financial reporting. One of the biggest risks farmers make as they grow is information risk.”