USDA OKs Choice for Farmers to Keep Inflation Reduction Act Relief—or Not

Posted on: July 13th, 2023 by

In the months since we visited the scenarios of Robert and Charles—two fictional farmers who received farm debt relief under Section 22006 of the 2022 Inflation Reduction Act (IRA)—the Farm Service Agency (FSA) has announced two major changes in how recipients can choose to deal with their new windfall.

Last year FSA repaid more than 13,000 farmers’ delinquent FSA-direct or FSA-guaranteed loans with IRA funds. With FSA’s new guidance in April, those farmers have choices and tools they can use to remedy the unintended consequences this repayment caused.

Distressed Borrowers Now Have Choices

In February, we met Robert and Charles, two fictional farmers who benefited from $800 million in IRA funds the USDA paid out in relief for distressed borrowers.

To recap: Robert defaulted on his FSA-direct loan in 2010 and the FSA foreclosed on his property, leaving an unpaid $100,000 deficiency judgment. His account was moved to currently not collectible, or CNC, status with no payment since. As of last year, his total balance was $150,000, including $50,000 interest.

Charles took out an FSA-guaranteed loan from a local bank and has been in default for several years. He has continued to farm while working with his bank under forbearance agreements, and his debt was moved into CNC status in 2019. The FSA repaid the remaining $400,000 of his loan last year, along with $12,000 in interest.

The IRA at first seemed like a win for both farmers, until each was left with a massive tax headache because the Internal Revenue Service (IRS) treats the principal repayments as income for 2022. For tax purposes, Robert earned an extra $100,000 and Charles, $400,000; now each owes additional taxes of approximately one-fourth of their principal relief. (The repaid interest is deductible.)

Worse, this additional income could push Robert or Charles above income thresholds for nutrition assistance such as SNAP or WIC, or from being able to use federal subsidies to help offset the premiums of self-employed health insurance. It could also cap their ability to contribute to certain retirement accounts.

Updates Offer New Options

Thanks to overwhelming feedback from advocates including Ag & Business Legal Strategies, on April 6 the FSA sent affected farmers a letter notifying them of two new options they have to deal with this sudden “principal income” (reflected on tax Form 1099-G, “Certain Government Payments” as part of reportable income for 2022).

The first is simply a change in status afforded to FSA-direct loan recipients. The FSA recharacterized these direct debts as being canceled rather than repaid; affected farmers should have since received an amended Form 1099-G and Form 1099-C, “Cancellation of Debt.” For Robert cancellation means if he was insolvent before the forgiveness, his tax bill is reduced. If he was still insolvent after the cancellation, then there will be no tax bill.

Returning IRA Aid—Some Farmers’ Best Option

The second major change the FSA announced is that farmers who had their debts repaid by IRA funds now have the choice to opt out of this assistance. While refusing free money might seem odd, tax consequences might make this the right choice.

Note that Charles doesn’t get the choice of the FSA canceling his debt—the FSA can’t cancel debt it guaranteed, it can only repay it or not. Faced with owing about $100,000 to the IRS, he might see smaller payments to the bank on the $400,000 over a long time as easier than paying the taxes sooner. He also has the option to file for bankruptcy, as FSA debt (or FSA-guaranteed debt) is generally dischargeable in bankruptcy while recent tax debts are not. If he decides one of these choices is better, he has until December 31, 2023, to contact his loan officer or the FSA with a written request declining IRA Section 22006 assistance.

On the other hand, maybe Charles’s accountant can work out a longer payment plan or an offer in compromise with the IRS, in which it would accept less than the $100,000. This could be better if maintaining the original debt to the bank is hindering his ability to borrow again and he can’t file for bankruptcy.

Another exception that could allow Robert or Charles to avoid paying taxes is if the debt is qualified farm indebtedness:

  • The debt was incurred directly in the trade or business of farming;
  • 50 percent or more of the debtor’s total gross receipts for 2019, 2020 and 2021 were from the trade or business of farming; and
  • The cancellation was made by a qualified person such as the FSA or a bank (not a related party).

ABLS urges farmers with tax problems to ask their accountants about deferring their tax liability through the qualified farm indebtedness exclusion — accountants may wish to read this blog post written by Ag & Business Legal Strategies friend and agricultural law and tax expert Roger McEowen.

If you received Section 22006 assistance but wish to decline, remember to contact your loan officer or the FSA before the end of this year and express your intent in writing. The FSA Call Center number is 1-877-508-8364.

In Conclusion

The final major clarification FSA offered is that accepting IRA assistance, whether that is debt repayment or debt cancellation, will not affect a farmer’s eligibility for future FSA funding. This was a concern at least one Ag & Business Legal Strategies client had.

In March the FSA announced it was providing a new round of $123 million in IRA relief to direct-FSA borrowers who qualify. These repayments were set to start going out in April. If you received notification on your loan, or have questions about qualifying factors, you can read more here.

The USDA’s and FSA’s efforts to provide additional relief in the wake of the IRA’s unintended tax consequences are certainly welcome. Ag & Business Legal Strategies is grateful the agencies recognized and addressed this, and that we were able to help shine a spotlight on these issues for them. If you have questions about your situation and how to proceed, contact your accountant, then reach out to Ag & Business Legal Strategies. We would be happy to help you plan a strategy to achieve your repayment and/or business goals.

At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.

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