What is Farm Income for a C Corporation?

We had a reader ask the following question:

“How do you compute non-farm income & expenses for Form 1120?”

Adjusted gross income (AGI) for a C corporation is much easier to calculate than for other taxpayers. It is simply the total amount of taxable income reported on line 30 (total taxable income) plus line 19 (charitable contributions).

For the 75% farm AGI calculation it can get a little harder. First, we have to determine if equipment gains qualify or not. In order for them to qualify, farm AGI without the equipment gains must be greater than 66.66% of total AGI. If it meets this hurdle, then it is considered to be farm income.

Then we need to review all of the income sources shown on Form 1120 and back out items that are not “farm” income. These items would typically be interest income, dividend income, capital gains and similar investment income. Most farm C corporations will almost always meet the more than 75% of AGI calculation unless they have a fair amount of investment income. A capital gain will still count if it is the sale of farmland or livestock.

The FSA Handbook 6-PL on pages 8-71 & 8-72 has a worksheet to help you calculate this information. However, it is not very helpful. Steps 1-3 help you arrive at average AGI for all activities. Steps 4-6 help you arrive at average Farm AGI. Step 7 has you divided step 6 into step 3 to arrive at average farm AGI. If greater than 75% then you qualify for additional limits. This is very understandable.

However, steps 8-10 now calculate the average AGI for equipment gains and input services unless these amounts were already included in steps 4-6. Once you have this percentage you would add it to the percentage in step 7 if you had not included it originally. This is clear as mud.

In our opinion, the verbiage “and not already included in steps 4, 5, and 5” should be clarified that this income should not be included in steps 4-6 since you have to determine that Farm AGI without this income first. Then you can do steps 8-12 if needed (only needed if you have equipment gains). Now, we are trying to get FSA to understand that equipment gains reported after December 31, 2017 should be automatically considered farm income due to the Tax Cuts and Jobs Act of 2017 changing the tax rules.

Let’s look at an example:

ABC Farm Corporation has line 30 taxable income of $500,000, $350,000 and $185,000 for 2017-2019 (we are doing a 2021 crop year calculation). There are no charitable contributions. Investment income is $75,000 for each year. Total AGI is $1,035,000. Farm AGI is $225,000 lower (3 X $75,000) at $810,000. Farm Average AGI is 78.26% and it would qualify for the increased payment cap.

Now let’s assume that there is a total of $150,000 of equipment gains. In this case, farm income without these gains is $660,000 and this results in farm AGI of 63.77%. Therefore, since this is less than 66.66%, we can’t count the equipment gains for ABC Farm Corporation and it does not qualify for the increased payment cap.

As you can see, this gets very complicated very quickly.

But we are not done. Now, we have to drop down to each owner and determine if their farm AGI is greater than 75%. For those who are not greater, a reduction in the payment cap will be made. For example, assume there are three equal owners in ABC and one owner does not meet the test. Instead of qualifying for $250,000, the corporation now has a payment cap of $208,333.

We will keep you posted if there are any changes to how this is calculated.