Tax And Business Planning For Farmers To Avoid Higher Taxes And Loss Of Subsidies

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The Agricultural Act of 2014 (aka -  the 2014 Farm Bill) has been controversial, to say the least.  Among its many changes are an $8 billion cut to the “food stamp” program.  The Farm Bill also drastically modifies or ends farm “subsidies.”

In our global marketplace, these subsidies are often necessary to help American farmers compete.  In my opinion, the American farmer can compete and beat anyone in the world,  but not compete when foreign governments provide excessive subsidies to their own farmers.  It is hard to win a 100-yard dash when your competitor starts 25 yards ahead of you.

This new legislation has made it vital to sit down with your tax professional and do some planning to avoid losing the support of the remaining governmental programs – while at the same time not getting hit with additional taxes.

An interesting article was published last month by Roger A. McEowen with the the Iowa State University Center for Agricultural Law and Taxation.  The article makes the point that beginning with the 2014 crop year, farmers with an “adjusted gross income” of greater that $900,000 will not be eligible for certain programs.  The definition of “adjusted gross income” depends on the type of entity that is being used.  Mr. McEowen states the following:

  • For a C corporation, FSA examines line 30 (taxable income) plus line 19 (charitable contributions).
  • For S corporations, FSA only looks at line 21 of IRS Form 1120S (ordinary business income or loss).
  • For estates or trusts, FSA uses line 22 (taxable income) plus line 13 (charitable deductions) of IRS Form 1041.
  • For limited liability companies (LLCs), limited liability partnerships (LLPs), limited partnerships (LPs) or similar entities, FSA looks to IRS Form 1065, line 22 (total income from trade or business) plus line 10 (guaranteed payments to partners).
  • For individuals, the pertinent Form is the 1040, line 37 (AGI).
  • For tax-exempt entities it’s IRS Form 990-T, line 34 (unrelated business taxable income) less income that the CCC determined to be from non-commercial activity.

These rules can cause “unfair” treatment.  For example, if a company has a large capital expenditure that would be normally deductible under section IRC 179 may artificially increase your “adjusted gross income” for purposes of qualifying for the subsidies.  If you have an S-corporation/LLC/Partnership, this deduction counts against you for purposes of qualifying for governmental “subsidies.”  Alternatively, a C-corporation will not be penalized for the exact same purchase.

So does this mean you should convert to a C-Corporation?  Not so fast - a thorough review of your situation is needed before you can really make a decision.

Just a few points to consider:

  1. C-Corporations will potentially subject you to two levels of tax: a) one level of ordinary income for the corporation at 35% maximum rate and b) dividends to shareholders at up to 23.8% (thank you President Obama) for a total tax of up to 58.8%.
  2. Sales of S-Corporations and Partnerships also get preferential tax treatment by avoiding one of  the Obamacare taxes.
  3. Estate Planning - C corporations are also not the ideal estate planning mechanism if you want to keep the family farm - and not see it broken up by the Feds.

There are multiple other planning techniques that folks in the farming business need to consider – and consider now before they get unfairly penalized.

 

Topics:  Adjusted Gross Income, C-Corporation, Estate Tax, Farm Bill, Limited Liability Companies, Partnerships, S-Corporation, Subsidies, Tax Exemptions, Tax Planning

Published In: Agriculture Updates, General Business Updates, Tax Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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