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Potential changes to “Actively Engaged” rules

Potential  changes  to  “Actively Engaged”  rules

Heritage Bank proudly presents Focus on Ag, a column submitted by a Professional Farm Management Analyst

As part of the 2014 Farm Bill, USDA was designated to review and revise the “actively engaged” in farming rules that are used to determine individuals that are eligible to receive government farm program payments. The current “actively engaged” requirements have been in place for nearly three decades. In late March, USDA announced some proposed revisions to the “actively engaged” rules that are designed to further clarify some of the definitions and rules surrounding the requirement for “management” in a farm operation. This could potentially restrict certain individuals that currently qualify for farm program payments from potentially having future farm program payment eligibility beginning with the 2016 crop year.

The current regulation for farm program payment eligibility states that a person may qualify for federal farm program payments if they are “actively engaged in farming”. This is defined as meaning that an individual made a significant contribution of capital, equipment, or land for the farm, and provides personal labor or active personal management to the farm operation. In the past, the definition of “management” under the current requirements has been interpreted quite broadly by USDA, which has allowed a large number of extra individuals to qualify for farm program payments. By using this definition of the rule, farms that are organized as “general partnerships” or “joint ventures” have been able to increase total government payments to a farm entity by having more than one individual in the entity qualified for farm program payments.

There are many legitimate general farm partnerships and joint ventures, where multiple individuals deserve to qualify for farm program payments, and USDA does not intend to affect these types of operations by any proposed changes to the “actively engaged” rules. This includes husbands and wives, father and sons, bothers, other family members, and other legitimate farming partners that meet the requirements. However, the U.S. Government Accountability Office (GAO) filed a recent report that showed several examples of situations where the current regulations have been used to expand farm program payment eligibility well beyond the original intent of the “actively engaged” rule.

The revisions in the “actively engaged” rules being proposed by USDA would add more eligibility requirements for a farm entity wishing to have multiple individuals qualify for farm program payments. The new rules are not intended to apply to farming operations that are comprised entirely of spouses and other family members, or for legitimate partnerships where all partners are actively farming. The proposed rules also would not affect program payment eligibility for landowners that rent their farm land to a farm operator through a share rental agreement. There are also no proposed changes to current rules for contributions of land, capital, equipment, or labor.

The primary focus of the “actively engaged” revisions would focus on defining contributions to “management” of a farm operation where multiple individuals desire farm program payment eligibility. This definition is intended to apply to non-family members of a farm business that are using “management”, rather than “labor”, as their qualifying criteria for farm program payment eligibility. The proposed rule defines “active personal management” as “those items critical to the profitability of the farming operation”. It would divide the management activities into separate categories for farm capital, labor, and agronomics, and marketing. To qualify, a person must perform these management duties on a regular and consistent basis, which is defined as either 25 percent of total management hours required by the farm operation, or at least 500 hours of management annually. These requirements are not intended to apply to the first, or primary, farm manager in a farming operation.

Under the revised rules, no farm entity could have more than three persons qualify for farm program payments as “managers” of the farm operation. If the farm entity seeks to qualify more than one person as a “manager”, then each additional person would be required to keep a record or log of their additional management activities, which would be required to be submitted to the Farm Service Agency (FSA) office. Qualifying additional “managers” would not be automatic, and would need to be approved by FSA.

A farm entity could qualify for one extra person for farm program eligibility through the “management” definition based on the size of the farming operation. A crop farm of at least 2,500 acres would meet this requirement, which is based on farm management data showing that a full-time farm manager (2,040 hours per year) is capable of managing 2,527 crop acres. USDA would allow for a variation in this requirement of up to 15 percent, or 375 acres, depending on unique circumstances in the farming operation. A sheep operation with more than 3,500 ewes, or a honey bee operation with over 10,000 hives, would also qualify as a large farming operation. There are separate farm program payments for both wool and honey that fall under farm program payment eligibility rules.

A farm entity could also meet the criteria for one additional person to qualify for farm program eligibility as a farm “manager”, based on the “complexity” of the farming operation, which is a bit more complicated. The complexity of the operation refers to multiple crops being produced, other non-program farming entities (livestock, canning crops, etc.), and non-traditional marketing channels (export, organic, etc.). Evaluating the complexity of a farming operation is much more subjective than determining the size of a farm, and would require FSA review and approval.

The proposed changes to “actively engaged” rules would apply only to general partnerships and joint ventures, since these are the only type of farm entities that currently allow multiple individuals to receive farm program payments. Corporations or limited liability corporations (LLC’s) are currently not eligible for more than one payment limit, and this would not change under the revised regulations. The farm program payment limit under the current Farm Bill is $125,000 per individual for payments from all types of farm programs. So, in a general farm partnership or joint venture that payment limit would increase to $250,000 for two qualifying  individuals and $375,000 for three individuals.

The proposed USDA changes in the “actively engaged” rules would be implemented under the current Farm Bill for the 2016-2018 crop years, but would not affect farm program payments for the 2014 or 2015 crop years. The proposed USDA changes to the “actively engaged” rules are currently under a 60-day review period for public comment, which is scheduled to end on May 26, unless the comment time is extended. Following the 60-day comment period, USDA would be free to implement the proposed changes in requirements for future farm program payment eligibility, beginning with the 2016 crop year.

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