If you’re thinking about reshuffling your farm entities, here’s a Tax Court case worth watching.

Johnson Farms, a cattle and egg operation out of Everton, Missouri, is challenging an IRS notice that says a 2021 restructuring quietly handed two of its partners a taxable distribution they never saw and never received in cash.

The setup is one a lot of family operations will recognize. Johnson Farms ran as a Missouri general partnership owned by four brothers — Joshua, Alex, Brent, and Stephen. In the fall of 2021, they split the business into two new LLCs: one for the farming assets, one to hold the land. The operating company then signed five new promissory notes with a new bank, refinanced the farmland and chicken barns, paid off the old bank loans, and the members personally guaranteed the new debt just as they had guaranteed the old.

The IRS looked at that reshuffle and saw something the family didn’t. It issued a notice asserting a $507,126 underpayment for 2021, plus a $101,425 penalty under Section 6662. The theory: the restructuring reduced certain partners’ shares of partnership liabilities under Section 752(b), and a drop in your share of debt is treated as a deemed cash distribution. The agency put Brent’s relief at $1.1 million and Stephen’s at $188,545 — roughly $1.3 million of “distributions” conjured out of a paperwork change.

Johnson Farms is fighting the entire assessment, arguing the IRS used a mechanical formula instead of reading the actual notes and guaranties and ignored the guarantees the members signed in 2020 and 2021. We’ll see how it plays out. But the warning for the rest of us is already clear.

Why debt allocation is the whole ballgame

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A lot of farm corporations started life as C corporations, elected S status somewhere along the way, and never gave another thought to the accumulated earnings and profits (E&P) they dragged along with them. That leftover E&P sits quietly on the books until it bites. If your operation was ever a C corporation, the deemed dividend election is a tool worth knowing about.

Why old E&P matters

An S corporation that was always an S corporation has no E&P, and life is simple. A former C corporation, though, carries forward whatever E&P it piled up in its C years, and that E&P creates two problems:

• The passive income “sting tax.” Under Section 1375, an S corporation that has E&P and passive investment income (rents, dividends, interest, certain royalties) exceeding 25% of gross receipts pays a corporate-level tax — at the 21% rate — on its excess net passive income.

• Loss of the S election. Under Section 1362(d)(3), if that same combination — E&P plus passive income over 25% of gross receipts — runs for three straight years, the S election terminates automatically.

For a farm that has leased out ground, put up a cell tower, or sold the row-crop operation and kept the land, passive income can quietly creep past 25%. The E&P is what arms the trap. Clear out the E&P and both problems go away.

How the election works

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If you raise grain and you’re charitably inclined, here’s a strategy that does three things at once. It wipes out the self-employment tax on a chunk of your crop, spreads the income tax over years instead of one painful spike, and eventually puts money in the hands of a charity you care about. The tool is a charitable remainder trust (CRT), and the key is contributing the grain itself, not the sale proceeds.

How it works

A cash-basis farmer has zero tax basis in raised grain. You already deducted the seed, fertilizer, fuel, and chemicals, so when you sell that grain, the entire check is ordinary income. And because it’s Schedule F farm income, it also gets hit with self-employment tax.

Now flip it. Instead of selling, you contribute the actual bushels to an irrevocable CRT before there’s any sale contract. The trustee, not you, then sells the grain. Because a CRT is tax-exempt, that sale triggers no immediate tax. The trust pays you a set percentage each year for the term you choose (up to 20 years, or for life), and whatever is left at the end goes to charity.

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The IRS just proposed raising the user fee for an estate tax closing letter from $56 to $76. Before you groan about another government price hike, the $20 bump isn’t the real story. The real story is that a lot of farm estates pay for something they can get for nothing.

First, the basics. An estate tax closing letter — IRS Letter 627 — is the IRS confirming it has accepted a filed estate tax return. It’s the executor’s signal that the file is closed and the estate can be wrapped up without worrying about personal liability for more tax down the road.

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Here is the bottom line up front: if you farm through an entity, your old Form CCC-902E is about to become history. None of the existing 902Es sitting at your county FSA office are going to roll forward. Every entity that farms — your LLC, your S corporation, your partnership, your joint venture — will need to file a brand-new 902E by September 15, 2026. No grandfathering, no exceptions.

Why the reset?

This traces back to the One Big Beautiful Bill Act (OBBBA) and the final payment limitation rule USDA released June 2, 2026. We have written several times about the good news inside that rule — qualified pass-through entities (QPTEs) can now multiply payment limits by the number of actively engaged owners, members can finally be paid salaries or guaranteed payments without blowing up eligibility, and AGI is tested at the owner level instead of at the entity.

All of that flexibility comes with a catch. The old 902E was never built to capture the information FSA now needs to apply these rules. The agency can’t take your 2020-era form and figure out how many limits your operation is entitled to. So, they are starting fresh which means everyone refiles, at least based on what we know and have heard.

What’s new on the form

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Buying next year’s seed, feed, fertilizer, chemicals, or fuel before December 31 is one of the oldest tools in the cash-basis farmer’s kit. Done right, you pull the deduction into the current year and smooth out income. Done wrong, the deduction gets deferred or denied outright. Two gates stand between you and that write-off.

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Only a general partnership and joint venture was allowed to have multiple payment limits as compared to any other entity such as an LLC or corporation.

However, beginning with the 2026 crop year, any qualified pass-through entity is now granted the same ability to have multiple payment limits. USDA finally issued the final rules on this change and the one thing we were worried about was AGI limits for S corporations or LLCs.

The good news is that these entities now have no AGI testing just like GPs and JVs.

Therefore, there is no reason for a farmer not to convert a GP to an LLC or similar entity after receiving our guidance this week.

We have seen many farm operations structured as a GP with multiple two person LLCs as the partners in the GP. Therefore, instead of simply having one tax return, we end up with three, four, five or even more tax returns just to simply get multiple payment limits.

This created additional compliance costs and burdens and finally OBBBA fixed this. Here is a chart showing how this may end up looking for many farm operations:

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A reader sent in a structure that looks, at first glance, like it should generate $400,000 of payments, but it won’t.

Here’s the setup:

• Wife is the landlord on a 30% crop share and qualifies for $50,000 of payments in her own right.

• Wife is also an 85% limited member of an LLC. Husband is the 15% manager-member. The LLC qualifies for $150,000.

• Husband owns 100% of a C-corporation operating entity, which qualifies for $200,000.

So, the three operations together qualify for $400,000. The question is how much the family actually collects once the rules run their course.

How the dollars get allocated

Payments are attributed to the individuals behind each operation, by ownership share. So:

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I was on AgriTalk today discussing the changes that were released by USDA yesterday/today on payment limits and various AGI changes.

Here is a link to the session.

The new updated rules on Qualified Pass-Through Entities will be posted as a Final Rule today.

Instead of trying to recap this in a blog post, attached is a memo that we worked up (with the help of Claude.AI). It provides the details on the new changes which overall are very favorable to farm operations with more than one owner and do not operate as a general partnership or joint venture.

Here is the memo:

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OBBBA created new Payment Limitations for Qualified Pass-Through Entities. Under the old rules, LLCs and S corporations were subject to one payment limit.

USDA just released the new rules on payment limits and here are our quick thoughts on the new rules.

The new rules will be effective beginning with the 2026 crop year as expected.

Members and owners will be allowed to be paid either salaries or guaranteed payments for their services to the entity. Under old rules, being paid for labor or management could have disallowed an entity from receiving payments.

There will be no AGI testing at the entity level. Each owner will be required to meet the $900,000 AGI limit. If they do not, then the payment will be reduced based on ownership 5%.

Each member of the entity will be required to meet the actively engaged rules.

This is our very quick look at the rules and will dig in further and will also review the Handbooks as they are updated.

But the bottom line is this is good news for most farm operations.

Starting today you should be able to access your base acre allocation by logging in as follows:

www.fsa.usda.gov/arc-plc

Many of you have probably already received a postcard from USDA indicating that is how to log on, but just in case above is the correct logon.

USDA Secretary Rollins announced the specialty crop details today.

They bumped the amount allocated from $1 billion to about $1.6 billion, however, the overall payment limit is only $250,000 and there is no boost if more than 75% of your AGI is from farming.

Under SDRP, if more than 75% of your AGI was from farming, your payment limit increased to $900,000.

Here is a chart showing the payments per acre:

As you can see there is simply three tiers plus a payment for certain beans and peas. To max out on payments in Tier 1 only requires 385 acres of production which many growers will easily exceed. However, many of these growers will operate as partnerships with multiple owners, but larger operations will see relief not like smaller operations.

You can start accessing your online application on Monday or wait a week to do it in the local FSA office. You are also subject to a $900,000 AGI limit both at the entity level and individual level.

We know that Hard Red Wheat growers this year will face large yield reductions. USDA is projecting that the final MYA wheat price will be $6.50 which is 15 cents higher than the effective reference price of $6.35, therefore, there will be no PLC payment if that price holds or does not drop below $6.35.

However, these growers can elect ARC-CO and that will make a payment even with the higher MYA price assuming that their yield falls below a certain threshold. We elected to work up some charts showing what the minimum reduction in yield needed to maximize the payment under ARC-CO.

Here is chart number 1:

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Paul was on AgriTalk today discussing the following topics:

• Base Acres Allocation going live on Monday June 1.

• How much yield must be reduced for wheat farmers to hit their maximum ARC payment for 2026 crop (paid next October) — This will be tomorrow’s blog post.

• A brief discussion on livestock tax deferral elections.

Here is the link to the show.

We’ve covered Section 1033’s four-year deferral and the one-year cash-basis election. Both are real tools that save real money. But there’s a third path worth running the numbers on: skipping the deferral entirely, recognizing the gain at favorable capital rates, and wiping it out with 100% bonus depreciation on replacement cattle or equipment purchased in the same year.

We know that sounds backwards. “Pay the tax on purpose?” Stay with us. The reason this works is that raised breeding stock generates one of the most tax-favored categories of gain in the entire tax code — Section 1231 capital gain with zero basis — and the permanent restoration of 100% bonus depreciation creates a matching deduction you can deploy in the same year. Under the right conditions, these two provisions can roughly cancel each other out, leaving you with a clean, full-basis herd and no deferred tax hanging over you.

First: Why Raised Breeding Stock Gain Is So Favorable

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OBBBA authorized an increase in Base Cares of 30 million acres. FSA has been working to get the allocations for all landowners ready and starting next Monday June1 you will be able to review these allocations online or contact your local office to find out how to get a copy of the allocation.

Due to understaffing we would suggest simply accessing the allocations online which does require a Login.gov account.

Here is a link to the summary from USDA.

You will have from June 1 to August 31 to review the allocations. If you agree with the allocations, there is nothing for you to do. If you do not agree, then likely you will need to communicate this information to the local FSA office.

The landowner will be the one receiving the allocation not the farmer (unless the farmer owns the ground).

In Part 1, we covered Section 1033 — the powerful four-year deferral for breeding, dairy, and draft livestock sold due to drought. But what about feeder cattle? What about the cow-calf producer who weaned calves in June instead of October because the grass was gone? Section 1033 won’t help there. The one-year deferral will.

This provision gets overlooked because it doesn’t have a flashy code section name people throw around. It does something straightforward: if drought forced you to sell livestock earlier in the year than you normally would, you can elect to recognize that income in the year you normally would have sold — not the year you actually sold. One year of deferral. Simple, clean, and available regardless of what kind of cattle you’re running.

Who Can Use This Election

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This has nothing to do with tax or business, but I thought today I would explain the above photo.

My parents got married later in life (dad was 46 and mom was 35) and I was born a little more than 9 months after they got married. My mother was the oldest of 12 kids and liked to take care of her younger siblings.

One of her sisters was married to a minister and my parents helped move them to Packwood, Washington which is in the Cascade Range of mountains. My parents took me along on the move and while we were there, we went blackberry picking and I tagged along. Based on the photo, I am guessing I am not quite 2 years old.

For some reason I vividly remember going out in the woods with them and picking the berries, but as you can see I likley put more berries in my mouth than I did in the bucket.

I may from time-to-time post some of our old photos. My brother was able to convert over 1,000 slides into digital photos and periodly I will post some of them.

This post is Part 1 of a 3 Part Series.

Pastures are burned up, hay is $300 a ton, and you just sold 200 cows you never intended to sell. The last thing you need is a massive tax bill on top of everything else. The good news: Congress anticipated this exact situation and wrote Section 1033(e) specifically for it. Here’s how it works.

Every drought season we get emails from ranchers who are stunned by the tax bill sitting on their desk. They sold raised breeding cows at $4,500 a head — animals with zero basis — and suddenly they’re staring at $400,000 or $500,000 of taxable gain. What they didn’t know going in is that the tax code treats those sales very differently from a normal cull. If you qualify, you may be able to defer every dollar of gain until you’re back on your feet and rebuilding the herd.

What Section 1033 Actually Does

Section 1033(e) of the Internal Revenue Code classifies the drought-forced sale of breeding, dairy, or draft livestock as an involuntary conversion which is the same as a barn fire or a government condemnation. That classification is enormously valuable, because it lets you defer recognition of any gain as long as you replace the property within the allowed replacement period.

Note what’s excluded: poultry never qualifies. And the livestock must be held for breeding, dairy, or draft purposes — feeder cattle and market animals don’t get this treatment. The simpler one-year deferral available for those animals is covered in Part 2 of this series.

Does Your Operation Qualify?

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