USDA Releases Proposed Definition of “Actively Engaged in Farming” That Would Have Little Practical Application
The 2014 Farm Bill was enacted into law in early 2014. It contains the farm program rules that will govern participating farmers for the next five years. Under the new rules, the total amount of payments that an individual or entity can receive either directly or indirectly (except for a joint venture or general partnership) for any crop year is $125,000. Spouses are able to double that amount, and a separate limit applies to peanuts. Any amount received from forfeiting a non-recourse loan is not subject to the payment limit. This only applies, of course if adjusted gross income is at or below $900,000.
Both the initial House and Senate versions contained language that specified that active personal management would not satisfy the “actively engaged in farming” requirement. Under those bills, an individual would have had to make a significant contribution of personal labor, except for a farm manager (one per farming operation). But, those provisions didn’t make the final cut, and really nothing changed with respect to the active engagement test. However, the Farm Bill specified that within 180 days of enactment, the USDA Secretary was to write regulations defining the term “significant contribution of active personal management” and perhaps set limits for various types of farming operations based on the number of individuals who can be considered to be actively engaged in farming with respect to the farming operation when a significant contribution of active personal management is the basis used to meet the requirement of being actively engaged in farming. But, the Farm Bill said that the regulations are not to apply to entities comprised solely of family members.
Well, the USDA Secretary badly missed the 180-day deadline, coming out with the proposed regulations today – over 400 days after the date of the Farm Bill’s enactment. Under the proposal, the USDA says that, “Farm managers who don’t contribute at least “500 hours of substantial management work per year, or 25 percent of the critical management time necessary for the success of the farming operation…” can’t collect taxpayer subsidies.
But is that restriction really that limiting? Probably not. As noted above, it doesn’t apply to “family” partnerships or joint ventures. That’s the way most farming operations have been traditionally structured so that they can take advantage of the payment limitation rules.
This all means that for most farming operations, there is no change from the “old” rules. That means that payments to a legal entity will be “attributed” to persons with a direct or indirect ownership interest in an entity through up to four levels of ownership in
any embedded entities. In addition, if one spouse is determined to be “actively engaged” in farming, the other (non-farm) spouse is deemed to have made a significant contribution of active personal labor, active personal management or a combination thereof to the same farming operation for purposes of the active engagement test.
Payments will be directly attributed to individuals that are actively engaged in farming, whether as an individual or as a member of an entity. Sole proprietorships and general partnerships are treated alike under the active engagement test. Revocable trusts are also treated as an individual if the grantor is the beneficiary of the trust. But, other types of business structures that limit liability of the owner(s) are treated as an “entity.” These entities include C corporations, S corporations, limited liability companies (LLCs), limited liability partnerships (LLPs) and irrevocable trusts.
Satisfaction of the active engagement test is often explained by use of the “right hand” and “left hand” rules. The “right hand” rule requires active personal labor and the “left hand” rule requires active personal management, such as a combination of a contribution of land, capital, and equipment.
At the entity level, every shareholder must provide documentation of contribution sufficient to satisfy the active engagement test. The contribution must be on a regular basis, identifiable and separate and distinct from anyone else in the entity. A good practice to ensure satisfaction of the active engagement test is to maintain up-to-date business notebooks and/or entity meeting minutes.
The USDA proposed rules can be found here: http://www.fsa.usda.gov/Internet/FSA_Federal_Notices/activelyengaged.pdf
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