Tax planning is big money saver

Farming is a lot like show business — most farmers like the ‘show’ part of planting and tending crops, few like the ‘business’ end of it. Building business partnerships is a good way to lessen the burden of managing a farm business.

Lowell Taylor, a CPA and business partner in the firm of Perry and Crone in Williamston, N.C., recently sat down with more than 200 farmers to discuss the business side of farming during a meeting of the North Carolina Corn Growers Association.

“I’ve worked with many of my farmers for 20-25 years. I know them, I know their kids — they aren’t afraid to pick up the phone and call me. They know a five minute phone call before the fact that prevents them from making an error won’t cost them anything, but a 30 minute phone call after the fact will,” Taylor says.

“The biggest thing I can help farmers with is their tax plan. The best way to make a good tax plan is timely information. I tell my farmers, if you’re going to buy new land, major equipment, any high dollar item — call me before you buy it.”

Over the past 20 years farms have gotten fewer and fewer, but those remaining have grown bigger and bigger. It doesn’t take a large farm anymore to be a multi-million dollar business operation. As farms have gotten larger, the business side of farming has grown more complex.

Most farmers know all too well the business rules and regulations they have to follow that other business owners don’t have to follow. However, too many times farmers don’t understand they have some tax rules that are beneficial to them, but not available to other business owners.

“Knowing what you can and can’t do from a business standpoint can be just as critical as knowing what you can and can’t plant on certain fields. A business plan for farmers these days is very complex,” Taylor says.

“Tax credits for pre-paid items can be a big advantage. Carryover of crops, crop insurance proceeds, and farm income averaging are just a few of the many options farmers have available to help in putting together a comprehensive business plan,” he adds.

The IRS defines Prepaid Farm Expenses as the amount a farmer pays during the tax year for the following items: Feed, seed, fertilizer and similar farm supplies not used or consumed during the year.

Prepaid farm supplies do not include any amount paid for farm supplies on hand at the end of the tax year that you would have consumed if not for a fire, storm, flood, other casualty, disease, or drought.

Depreciation of farm equipment can be a huge factor in farm profitability — or not, says Taylor. Tax rules for depreciation change frequently and changes made from 2009 to 2010 can be big for farmers.

“Last year we could spend up to $250,000 for a piece of farm equipment. In 2010, on the same piece of equipment the depreciation allowance is reduced to $134,000.

“It would be a shame if a farmer waited until January 2010 to buy a $250,000 piece of equipment — the tax difference is big dollars. That’s the kind of mistake a five minute phone call can prevent from happening, and that goes back to building business partnerships for farmers,” Taylor says.

Most farmers own land that is not used for farming. Land in conservation programs or in pine trees has different tax advantages and liabilities. Knowing which will work under certain conditions can save or make farmers a lot of money.

How to operate a farm can have a big impact on a farm business plan. Whether a farm is set up as a sole proprietorship, corporation, LLC, or partnership is a big decision — from a tax standpoint.

• Sole Proprietorship: A selling point of the sole proprietorship is that it doesn't require the consultation with attorneys and accountants that forming a corporation or partnership may. As a sole proprietor, you and the business are one — that's both the biggest advantage and disadvantage. Income passes through the business to you as an individual, so it is not taxed twice as with a corporation.

However, that simplicity has its drawbacks in a lawsuit or tax action. A producer's personal assets, including a home, car and child's college account, are not protected from lawsuits or tax actions.

• Corporation: Incorporating a farm requires more formal business arrangements than the typical sole proprietorship or partnership. A corporation is "born" when formal documents are filed with the state corporation commission. The major advantage of incorporation is that it provides protection from personal liability for legal or tax problems. The major downfall of a corporation is that it is taxed as a separate entity.

• LLC: The Limited Liability Company is an attempt to combine the best features of a partnership and a corporation, while avoiding the drawbacks. On one hand, sole proprietorships and partnerships have tax advantages, but they don't protect business owners from personal liability. Corporations can provide that liability protection, but their earnings can be taxed at both the corporate and individual level. The advantage of the corporation that farmers want to hold on to is the limited liability, hence its name.

• Partnership: Like a marriage, a farm partnership is often much harder to get out of, than to get into. Because farms often involve extended family, business partnerships are common. In most farm partnerships, two related but unmarried people are in business together, such as two brothers, or a parent and son or daughter.

At tax time, partnerships have clear advantages. For partnerships, tax returns are basically informational. After details are filed on the partnership form, each shareholder fills out a form that's attached to his or her return, where the income is taxed for the first time. It's a huge advantage in that the partnership itself pays no tax.

On the downside, many farmers are sometimes surprised to find out they're considered legal partners when facing a lawsuit or tax action.

“How a farm is set up can have a huge impact on farm estate planning,” Taylor says. “Most tax planners agree that Congress is going to pass some new guidelines this year to replace the estate tax which ended in December 2009. Most likely the new guidelines will be retroactive to Jan. 1, 2010. How farmers use these new guidelines can make millions of dollars of difference in what is left to heirs of the farm, he adds.

“With proper planning, a CPA with a farm background and a good knowledge of farm operations can save a farmer a lot of money. The more involved we are in the planning stage and the more information we have prior to making major financial decision, the more successful we can be at helping farmers improve their bottom line,” the North Carolina CPA says.

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TAGS: Management
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