Update on Farmland Development (P.A. 116) Situation

In March I blogged about Governor Snyder's proposed budget plan, which purports to eliminate all tax credits, in what he articulates as a "leveling of the playing field." Whether you buy that or not, it is clear that his approach is moving in that direction.

Last month, the new Michigan Corporate Income tax was enacted and signed into law by the Governor. Somewhat to the surprise of many of us, this new corporate tax is the primary significant new tax. While there are also adjustments to the credits allowed for certain personal income tax returns beginning in 2012, the proposal to eliminate the P.A. 116 credit was not part of the new legislation, except as it relates to corporate-owned farmland. The law recognizes a potential unfairness to corporations that have unused credits, and provides for an election to continue filing under the former "Michigan Business Tax" until they have exhausted their unused credits. This would, presumably, include P.A. 116 credits available to the corporation for land it owns.

It is very important not to confuse this with corporate farming operations, which are common in Michigan. Usually, these farming corporations involve some aspect of operations, only. They generally do not own land—or if they do—it is small parcels which house barns, elevator operations, offices, tool sheds, and the like. Unless the acreage is significant, it is probable that the benefit from the P.A. 116 credit alone is not enough to cause a taxpayer to elect under the old taxation scheme.

On June 30, Michigan Farm Bureau's Michigan Farm News reported that the Snyder proposals have yet to be introduced in the Michigan Legislature. Thus, at this point the proposal to eliminate the P.A. 116 tax credit program remains conjecture. However, numerous factors, including continuing state budget deficits, the current administration's views, and a currently supportive legislature, strongly suggest it may still be coming.

The "reprieve" does not appear to have impressed the majority of my farm clients. I am still being told by most of them that it is their intent to extend all their agreements, and enroll land that was not previously enrolled, at the earliest possible opportunity. Many have already officially made this request. We are currently assisting a number of others with that.

As I noted in my previous blog, the analysis has changed. Where many farmers previously "managed" the agreements for the shortest duration with a plan to extend periodically, today farmers are looking at how long the extension should be. For "legacy" operations, the consensus seems to be to extend to the maximum allowable duration (90 years from the time the land was originally enrolled). Others are trying to make the difficult prediction of how long the land might stay in agricultural production and whether they have heirs that will continue to maintain farming operations.

The MDA-Farmland division is significantly backlogged with extension requests. The Michigan Farm New article above, quotes Richard Harlow, director of the MDA-Farmland Program as saying they had received, over 10,000 contract renewal/extension requests already in 2011. He notes that in a normal year, they get round 3,000 annually. With a November 1 deadline in order to be eligible for 2012 credits, I expect this number to increase significantly. Do not expect a rapid turnaround. As far as I am aware, there has not been a significant increase in resources available to process these requests.

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Snyder Budget Targets Farmland Preservation Credits

Governor Snyder's proposed budget focuses on removing tax credits he regards as benefitting special interests. In my view, we all have our own special interests, and our economy is made up of many, many such special interests. In this case, the special interest is owners of farmland and open space land which is subject to (or could be subject to) a Farmland and Open Spaces Development Agreement. The act, so-called P.A 116, provides that qualifying lands can be enrolled in a program administered by the Michigan Department of Agriculture, for a period of years (generally from 10 years to 90 years). The agreement provides that such lands may not be developed or used for purposes other than agricultural production (or in the case of open spaces, left open or for recreational use) during the pendency of the agreement.

In return, the landowner is give a tax credit which is based upon the acreage enrolled and the "household income" of the landowner under Michigan's income tax law. The agreements also exempt the landowner from special assessments on the property for adjacent services during the term of the agreement. If the land is removed from the agreement at its expiration, a lien for the past 7 years of credit claimed is placed on the land and will become due upon the transfer of the land to another owner.

Conventional wisdom (well, mine, anyway J ) said that an agreement should be entered for the minimum period allowed and then extended for the minimum period each time (extensions could be a minimum of 7 years). However, if passed the Snyder budget (and subsequent enabling legislation) will change that convention. In a recent interview, the governor acknowledged that the existing agreements are a matter of contract to which the state is obligated. In other words, regardless of the result of the budget act, existing agreements will continue to be honored. This will include agreements due to expire in the future, no matter how far out into the future. However, it is probable that on passage of a new law in concert with the Snyder proposal, after some period of time (presumably as soon as November, 2011), new agreements will no longer be enrolled.

This gives rise to an interesting and different analysis. P.A. 116 allows a landowner who has a current contract to extend that contract. The contract may be extended at any time during the agreement. Now there is some incentive for farmland owners to at least consider extending their contracts for a longer term, in order to insure continued P.A. 116 credits. As well, landowners who have not yet enrolled their land in the program now have a potential looming deadline, as well as an opportunity to preserve the credits going forward. At the same time, any analysis should also include consideration about intended and potential future uses of the land. Once in the agreement, it will be very difficult, if not impossible, to remove the land from the agreement in order to sell or use it for purposes other than the production of agricultural crops or open space and recreation.

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