A presentation from the Equine Business Conference presented by Michigan State University, University of Minnesota, University of Nebraska, and Iowa State University, and partly funded by the North Central Regional Center for Rural Development. Presenter: Michelle Greenlee, Farm Financial Consultant.
3. Choices of Entities
• Sole Proprietor
• Partnership
• LLC / LLP
• S - Corporation
• C - Corporation
4. Choosing The Right Entity
• Sole Proprietor
Files a Schedule F (On your Individual Tax Return)
• Partnership
• LLC / LLP
• S - Corporation
• C - Corporation
7. Choosing The Right Entity
• Sole Proprietor
• Partnership
Historically the most common entity for multiple members
Files a 1065 Form (Separate Tax Return)
• LLC/LLP
• S-Corporation
• C-Corporation
8. Partnership
Pros
• Easy to Form, Easy to Quit
• Simple Way to Split Income and Expenses
• Easier Record Keeping (No Payroll), BUT The Books
Must Balance.
9. Partnership
Cons
• No Liability Protection for General Partners
• Pays SE on All Income
• Can Not Provide Tax Free Benefits to Partners
10. Choosing The Right Entity
• Sole Proprietor
• Partnership
• LLC/LLP
Considered a disregarded entity by the IRS
Can Elect to be taxed as a partnership or corporation
No tax benefit to electing a corp status over just being a
corp.
• S-Corporation
• C-Corporation
11. Limited Liability Company (LLC)
Pros
• Some Liability Protection for All Partners
• Easy to Form
• Almost All Benefits of a Partnership
12. Limited Liability Company (LLC)
Cons
• Pays SE on All Income
• Can Not Provide Tax Free Benefits to Partners
• Considered “1 Person” for FSA Payments
13. Choosing The Right Entity
• Sole Proprietor
• Partnership
• LLC/LLP
• S-Corporation
Files separate tax return on form 1120-S
Separate entity, income flows through the corp tax return
to the personal return.
• C-Corporation
14. S - Corporation
Pros
• Provides “Corporate Veil” to Protect Liability.
• Can Bifurcate Income to Limit SE Taxes
Pay yourself rent for land, buildings, machinery held personally
Pay yourself a wage (mandatory)
• All Income Flows Through Shareholders to Limit
Retained Earnings
15. S- Corporation
Cons
• Entity Debt > Basis Limits Deductions
• Tax Liability Due at Dissolution
• Benefits Not Allowed for Employee Owners
of > 2%
16. Choosing The Right Entity
• Sole Proprietor
• Partnership
• LLC/LLP
• S-Corporation
• C-Corporation
• Files Separate Tax Return on form 1120
• Pays tax on the income
18. Corporation
Cons
• Retained Earnings Double Taxed on Liquidation
• Cash Doesn’t Easily Flow Between Individual and
Corp
• Record Keeping Work Increases.
19. Why Would You Change?
• Tax Reasons
• Cooperative Farming
• Generational Transfers
• Estate Planning
• Legal Protection
20. Why Would You Change?
• Tax Reasons
Mainly Saving SE Taxes
S & C Corps: Pay yourself a reasonable wage(mandatory)
Pay SE tax only on the wage.
Pay yourself rent on land, building, and machinery held personally
No SE tax on rent
Some Income Tax Savings C-Corp
2012 pay capital gains tax on dividends
Tax free benefits
22. Why Would You Change?
• Tax Reasons
• Cooperative Farming (Shared resources/operation)
• Generational Transfers
Isolate Operational Unit
Share Equipment
Gift/Purchase Shares over Time
• Estate Planning
• Legal Protection
23. Why Would You Change?
• Tax Reasons
• Cooperative Farming (Shared resources/operation)
• Generational Transfers
• Estate Planning
Minority Discounts
Gift/Purchase in Partial Amounts
• Legal Protection
24. Why Would You Change?
• Tax Reasons
• Cooperative Farming (Shared resources/operation)
• Generational Transfers
• Estate Planning
• Legal Protection
Insurance is no longer sufficient
Operation is more at risk
25. When To Change?
• For Income Taxes?
Net Farm Income is consistently $100,000 for MFJ
• A change to the business
A child returning to the farm
A new entity or enterprise added
26. When’s To Change?
• Liability issues change
Livestock operations
Net worth is at a point where insurance is not sufficient.
• Reaching Net Worth levels that need an estate plan.
Individuals with net worth’s over $5 million ($10 million if
married)
For 2012 only (Returns to $1 million each in 2013)
27. Potential Pitfalls - S-Corp
• Possible legislation to make all earnings from an S-
Corp subject to Self-Employment Taxes
Negates almost all benefits to S-Corp status.
• Regardless of action taken by Congress to change
this, the issue of “Reasonable Wage” has been a
HOT audit area.
MUST be paying at least some wage!
• Must have basis to take money out of the
corporation.
Problem if the corporation is not profitable.
28. Pitfalls - C-Corp
• Double Taxation:
Earnings from C-Corp belong to the corp
Only way to have access personally is through dividends
(ordinary income after 2012) or wages (subject to
employment taxes)
Dissolution of entity is expensive with corp paying tax on
sale of assets and double taxation.
Potential tax penalty if retained earnings become “too
high” inside the corp.
Not to hard in agriculture to explain that we are saving
for investment
29. Tax Drawbacks to Entities
• Loss of Step-Up in Basis
Machinery contributed to a corporation goes in at your
basis (No tax consequences)
Machinery in a corporation does not receive a step-up in
basis at the time of death, the stock owned receives the
step-up.
30. Nebraska Farm Business, Inc
3815 Touzalin Ave
Suite 105
Lincoln, NE 68507-1600
(402) 464-NFBI
info@nfbi.net
www.nfbi.net