ERP and Equipment Gains
A few years ago, the USDA retooled the former Wildfire and Hurricane Indemnity Program and renamed it as the Emergency Relief Program or ERP. The amount of farm income is key to maximizing ERP payments, and the question was how USDA would treat gain from equipment sales. It’s still a big deal at the present time, as USDA’s FSA has dug its heels in on the issue.
ERP payments may be made to a producer with a crop eligible for crop insurance that is subject to a qualifying disaster and received a crop insurance or prevented planting payment in either 2020 or 2021. Later, The USDA announced the deadline for commodity and specialty crop producers to apply for the ERP for 2022 natural disaster losses was Aug. 14, 2024.
The ERP payment limit is generally $125,000. But, if more than 75 percent of average AGI comes from farming activities, the normally applicable $900,000 AGI limit is dropped, and the payment limit goes to $900,000 for specialty crops and $250,000 for all other crops.
Farm income for ERP purposes includes net Schedule F income, pass-through income from farming activities and wages from a farming entity. Also counting as farm income for ERP purposes is income from packing, storing, processing, transporting and shedding of farm products. But USDA says that farm equipment sale gains only count if farm income exceeds two-thirds of overall AGI. That will prevent many farmers from qualifying for increased payments.
The U.S. House version of the Farm Bill from early 2024, fixed the problem and treated equipment gains as farm income. The proposal specified that the trade-in of farm equipment that is reported on Form 4797 counts as farm income for farm program purposes. Hopefully, the change in administration will result in new leadership in USDA that understands the problem and will be amenable to changing the provision administratively rather than leaving it to Congress to solve the matter.
Rights When a Grain Elevator Fails
Occasionally, a grain elevator fails. In the late 1990s, many grain elevators failed when hedge-to-arrive contracts were abused a few years ago. The present economic situation in agriculture with low commodity prices is putting additional financial strain on elevators. An important question is that when an elevator fails and files bankruptcy, what are the rights of farmers that have grain stored there?
When a grain elevator files bankruptcy, a farmer with stored grain is not a creditor of the elevator. Instead, it’s a bailment relationship with commingled grain stored in the elevator owned in common by the farmers with grain in storage. The warehouseman is severally liable to each owner of grain commingled in the elevator. Thus, if there isn’t a grain shortage when an elevator fails, a farmer with grain stored at the elevator can get his grain in accordance with his warehouse receipt or scale ticket. The bankruptcy trustee cannot retain farmer-stored grain in the bankruptcy estate if there isn’t a shortage.
When there is a shortage, only holders of duly negotiated receipts have an interest in the remaining grain. When an elevator fails, there usually is less grain stored in the elevator than there are claims for grain. In this situation, the holders of negotiated receipts and scale tickets share pro rata in the remaining grain. If, after the pro rata distribution, a farmer has not been made whole, the farmer becomes a general, unsecured creditor of the elevator to the extent of the shortfall.
Hedging/Speculation Tax Treatment
Farmers and ranchers face price and production risks. One way to reduce risk is by using the commodity futures exchange markets to hedge the potential costs of commodity price volatility. For tax purposes, where’s the line drawn between hedging and speculating?
Hedging involves a transaction that is entered into in the normal course of the taxpayer’s trade or business with the primary purpose of reducing price risk in the commodities the farmer raises or grows. Speculation is an investment strategy unrelated to reducing price risk in the farmer’s actual commodities.
Hedging transactions generate ordinary income and loss. That means that the losses are fully deductible business expenses. The downside is that the income is subject to self-employment tax. Speculative transactions result in capital gain or loss. While speculative gains aren’t ordinarily subject to self-employment tax and capital losses offset capital gains, any excess amount is deductible against ordinary income only to the extent of $3,000 per year.
Also, to get hedge tax treatment, make sure to use the “farm” bank account or the proper farming entity. For example, the hog business entity should engage in hog futures transactions.
Spring 2025 Ag Law Course
During the Spring 2025 semester, I’ll be teaching an undergraduate course in agricultural law at Kansas State University. It’s taught live from the K-State campus on Tuesday and Thursday mornings (8:05-9:20 a.m. (cst)) but it is also an online course with students enrolled from across the country.
If you are a student, you can sign up for the course for academic credit, but if you are a student at someplace other than KSU, you'll need to doublecheck with your advisor to make sure you get credit. I would also encourage farmers, ranchers, agribusiness professionals, rural landowners, and other interested persons to register for the course.
If you are interested, please either email me or Ag Econ Dept. Chair Allen Featherstone (afeather@ksu.edu) and we'll see that you get registered.
I am looking forward to seeing you either in-person or online!
Here's the information about the course:
AGEC 516 – AGRICULTURAL LAW AND ECONOMICS
This course is designed for students who have an interest in farming, managing a farm, working in agribusiness, going to law school, or simply wanting to understand how the law impacts life daily. Being able to recognize potential legal issues to avoid potential problems is a key aspect of an overall strategy of risk management.
SPRING 2025
Prerequisite (if taking the course for credit): ECON 110 or AGEC 120 or AGEC 121 or ECON 120 and junior standing.
Course Components:
The course has three primary components, all involving “hands-on” applied learning:
- Business Transactions – this component addresses the basics of contracts and the common settings involving contracts and farmers; financial transactions; ag bankruptcy; and real estate/property issues.
- Income Tax; Estate Planning and Business Planning – this component examines tax rules unique to farmers as well as common estate and business planning issues and concerns for farmers and how to plan to keep the farm in the family for subsequent generations.
- Liabilities; Water and the Environment – civil and criminal law issues for farmers; water law; environmental law and regulatory issue for farmers including issues with the administration of USDA farm programs.
Schedule
The course meets on Tuesday and Thursday mornings for lectures and includes weekly quizzes; work problems, two examinations and a final.
Reviews
Many students and formers students over the years have commented on how useful and practical the course is or has been for the everyday matters that they deal with. Some have been inspired to go on to law school and are now practicing in rural areas across the country helping farmers and ranchers.
Questions? Prof. Roger A. McEowen: roger.mceowen@washburn.edu or rmceowen@ksu.edu
also: afeather@ksu.edu