Is Farming "Working at Home?" The Feds Say No

by Martin Harris

        While it's true that "history is written by the winners" (a quote sometimes attributed, but never found in print, to Winston Churchill in wartime London), it's also true that "the law is what I say it is" (a quote sometimes attributed, but never found in print, to Lewis Carroll's Red Queen in "Alice in Wonderland"), which explains how governments shape the behaviors of their subjects by defining the rules they should obey and controlling what they should know.

        In American agriculture, the historical pattern can be seen in the USDA's Yearbooks of Agriculture, which have been published since 1894. Those earlier than 1920 (the census year when farmers were first a minority in the U.S. electorate) focus mostly on growers' prosperity, standard of living, and improvements in labor, management and input productivity. Those published since that watershed year focus mostly on consumer food concerns: abundance, variety, healthfulness and cost. The 1896 edition offers instructions on growing hemp (for sale, not recreation); the 1977 edition is subtitled "Gardening for Food and Fun."

        The same pattern shows up in modern agriculture, with its twin trends of ever-larger-scale, high-productivity commodity production at the larger end of the economic scale, and mini farming, grow-your-own, niche/artisanal and direct sale at the smaller end. The former continues to produce for present-day wholesale farmgate prices only with deficiency payment taxpayer subsidies to enable seemingly lower consumer retail pricing. The latter is well-known for the premium pricing its (mostly) organic, small-scale and local offerings command at both farmers' markets and big box retailers.

        The former have been continually shrinking in operator numbers, while growing in operation size (dairy farms are now below 50,000 for the first time in history, with average herd size at an all-time high of 261, Hoard's Dairyman reports). The latter are growing in operator numbers and output (now estimated at near 20 percent of total U.S. food consumption, counting both organic and various categories of "natural" and local) while remaining relatively small (typically part-time with sole proprietorship) in operation size.

        In that context, you may chuckle at learning that nonfarm work-at-home types can typically claim a home office deduction on their income tax returns and don't have to declare "imputed income" from their house and garden, while "real farmers" have their net farm income defined by the USDA as including the imputed value of housing and kitchen garden. Here's the full definition:

        "Net farm income--The return (both monetary and nonmonetary) to farm operators for their labor, management and capital, after all production expenses have been paid (that is, gross farm income minus production expenses). It includes net farm income from farm production, as well as net income attributed to the rental value of farm dwellings, the value of commodities consumed on the farm, depreciation and inventory changes." Source: Congressional Research Service, Agriculture: A Glossary of Terms, Programs, and Laws, 2005.

        For example, when the business entity Go-for-Broke Farms, Inc. owns the farm and buildings, the farm family household gets imputed income from the farmhouse it occupies and the kitchen garden it cultivates. USDA economists Ted Covey and Mitch Morehart, in their paper "The Case of Rents," explain it thus: "Gross imputed rental value of farm dwellings is rental income 'earned' by the farm operator as the owner-occupant who, as the landlord, 'rents' his/her dwelling to him/herself."

        You can enjoy a second chuckle when you realize that the heavily publicized "2012 has been the highest net farm income" year in U.S. history (it's been in the $80,000 range for the last few years) includes just such imputed income.

        Not so heavily publicized have been the invested value stats: the average U.S. farm is now in the 420-acre range at a per-acre average value of about $2,600. Exclusive of buildings, that's just over $1 million, which, if it had been invested in the equities markets at the long-term 8.5 percent historic average (not the recent low interest rate) returns, it would have returned somewhat more than the $80,000 with zero operator labor except for farming the mailbox for the monthly passive income check.

        Such contrasts explain some of the attraction of mini farming for self-employed part-timers, typically with higher-than-average education and information sector skills, who can commute electronically from just about any rural area to just about any urban enterprise in finance, insurance, publishing, consulting or similar sectors and use their off-the-computer time on the mini farm.

        They also explain some of the factors underlying the "rural gentrification" phenomenon, whereby such formerly urban-center-only occupations can now be practiced just as well in distant rural counties, preferably just near enough to some small villages, cities or suburbs as to enable vendor participation in a farmers' market serving the newly in-migrated middle and upper-income populations, which prefer such locations and food purchase options. Indeed, the percentages for remote employment have been increasing sharply in recent years. The Census Bureau now reports that "some 13.4 million people, or 9.4 percent of U.S. workers, labored at least one day at home per week in 2010, compared with 9.2 million people, or 7 percent of U.S. workers, in 1997."

        In a Wall Street Journal news piece, we learn that "people in computing, engineering and science jobs saw one of the biggest shifts: the number of these employees working from home or partly from home jumped 70 percent between 2000 and 2010." In comparison, agricultural employment is now at 2 percent of the workforce, USDA stats show, although that number doesn't include the rapidly increasing number of part-timers in mini farming.

        We know from stats concerning the new health care laws that part-timers are 23 percent of the total workforce, and we know from stats concerning the continuing near-recession that formal labor force participation has now dropped to 63 percent from a year 2000 high of 67 percent, and students of the subject argue that some of that 4 percent has simply moved to the "informal" labor force, which includes such vocations/avocations as part-time mini farming and backyard grow-your-own. Hence the political irony: if you're a real farmer working at home, you have taxable imputed income from just such efforts; if you're part of the new "rural gentry" working at home, you don't. Maybe that's because the near 10 percent working at home, or the 23 percent working part-time, or even some of the 4 percent now in the "informal" labor market, are a far more potent component of the electoral calculus than the less than 2 percent in traditional agriculture, and it wouldn't be smart politics to displease them with the same tax rules that have been applied to that now nearly irrelevant 2 percent.

        Such election night media coverage as happened in the '50s--they'd wait for the farm vote, because at nearly 20 percent of the total, it might well have upstaged the more quickly reported nonfarm, city and suburban vote--isn't heard or seen anymore on the airwaves.

        If you are either annoyed or amused by the imputed income element in the legal/taxable definition of net farm income, you'll be more so to learn that professional tax preparers aren't in much agreement on how to handle it for "real farmers," incorporated or not, when the corporation is actually the traditional family farm operation in size and scope. They mostly agree on its applicability to large corporate farms, where resident managers aren't full owners, and they mostly on its nonapplicability to nonfarm work-at-home situations, with part-time farming, mini or otherwise, either included or not. The USDA explanation implies, but doesn't clearly state, corporate format as the determinant.

        Presently, there are lots of privately owned family farms that, for the usual litigation and tax reasons, have adopted the usually publicly owned corporate format. That may not be so for too much longer, and as that group shrinks, the entire imputed income question will do likewise. That's because there's an imperfect parallel between the shrinkage of the middle class in some states within nonfarm America (think Vermont, where they're leaving and taking their school-age kids with them, causing substantial K-12 enrollment shrinkage) and the shrinkage of the middle class in agriculture. In both contexts, a two-tier economy is emerging: above average in total household income at the ever-larger upper (commodity ag) and lower (mini ag) tiers, but in the nonfarm sectors an ever-larger upper-income and upper-wealth tier contrasting with a similarly growing low-income and taxpayer-subsidized tier at the lower end.

        As midsize farm numbers continue to shrink, those family farm operations (for practical purposes, corporate in name only) to which the imputed income language seems most questionable will shrink similarly. More significant in the longer term will be the new economics of agriculture, within which the relatively small dollar numbers in imputed income won't look significant against the emerging pricing powers of both the ever-larger-in-size commodity producers (think the smaller operation numbers and larger herd sizes in dairy) and the ever-larger-in-numbers mini producers (think the nationwide farmers' market and Whole Foods phenomenon), each of which already exerts its own form of pricing power.

        For the commodity producers, that's the sum of farmgate plus deficiency payments. For the mini producers, it's the consumer-demand-based price showing up at wholesale, if sold through an urban retailer, or at retail, if sold directly to consumers. Presently, the irony is that real profits at both ends of the size scale are elusive. On the commodity side they're almost always contingent on various governmental (urban-consumer taxpayer) subsidies; and on the mini side they're almost always contingent on operator subsidies of personal time and capital investment. To get a better picture, you'd need to impute income derived from just such subsidies. "Working at home" isn't too relevant.
        The author is an architect and former farmer.