On July 17, 2019 the FSA issued Notice PL-283 which provide clarification and updates around the applicability of Substantive Change for 2019 and beyond. This notice is important for farmer who is looking to make changes moving forward or has made changes to their entity structure for 2019 because the updates are applicable for the 2019 crop year.
What is Substantive Change?
Substantive Change is the term FSA uses as the standard you must meet if you are making entity structure changes to your farm operation that result in an increase in persons or payment limitations from one year to the next. There are many situations where Substantive Changes is not required to make changes to your operations. When substantive change is required, there are various ways to meet the standard.
When do the Substantive Change Requirements Apply?
Previous Guidelines- Under the previous guidelines, substantive change was required when you made changes to your operation that resulted in commonality between the old and new (same people farming some of the same land) and that increased the overall number of payment limitations.
New Guidelines- Now, substantive change is required when you make changes to your farming operation that results in commonality between the old and new (same people farming some of the same land) and there is an increase in the number of persons from the prior year.
So, what does this mean? Farmers now have flexibility to change their structure from one type of entity to another (e.g., from a limited liability company to a general partnership) or from one entity to multiple entities (e.g., from one corporation to 2 corporations), all farming the same ground so long as the number of people has not changed. For example, assume ABC, LLC was owned by A, B and C in year 1. In year 2, A, B and C could form a general partnership farming all the same acres as ABC, LLC and no substantive change would be required because the number of people did not increase. The effect in this instance, however means that farming operation went from being eligible for 1 payment limitation to being eligible for up to 3 payment limitations.
But - What about spouses? Under the old guidelines there was a specific note stating substantive change rules do not apply to spouses, meaning you could add a spouse at any time and the substantive change requirements did not apply. The new guidelines have omitted this note. The effect could very well be that adding a spouse may now put you in a position where you must meet this substantive change requirements. Clarification on this issue is being sought, but for now, you need to assume the substantive change rules would apply to spouses if adding your spouse increases the number of people and there is commonality with the operation from the prior year (same people farming some of the same land).
How to Meet the Substantive Change Requirements
If substantive change is not required, then you can proceed with changes, but what happens when you want to make changes and those changes require you to meet substantive change requirement? There are multiple ways to meet substantive change:
- Increase your base acres by 20% or more
- Adding family members (only if the operation has a majority ownership of family members)
- Changing from cash rent to share rent (only applicable for landowners)
- Sale/Gift of equipment/land (there are a lot of restrictions to meet this)
- Addition of new equipment
The new guidelines do not offer many updates to the ways to meet substantive change, but there is one thing to note regarding family members. The new guidelines specifically allow the addition of 1 or more family members, while the old guidelines only explicitly provided for the addition of 1 family member.
Recap. With the new guidelines, a producer has flexibility to convert an entity that was eligible for only 1 payment in the prior year to an entity(ies) eligible for multiple payments in the current year so long as there has been no increase in the number of people owning the entities. However, the omission of the note exempting spouses from the substantive change requirements will make it harder to add a spouse to a farming operation. Expect more details as the state and county offices get more information and start utilizing these guidelines.
If you want to read the entire notice, you can check it out here: https://www.fsa.usda.gov/Internet/FSA_Notice/pl_283.pdf