We are not incorporated, but accountant seems to think we can save some tax by Corporation. Would love to get some advice on incorporating from the AG TALK crowd.

What are the benefits and negatives on incorporating your farm ? ? ?

I noticed that the discussion below got off on a tangent about LLCs, and your question was never directly addressed.

My opinion......... is that farming is one of the types of businesses that can profit most from the economic benefits of incorporating.

Do a search on corporations.........the following comments are a summary of what I have preached before.

1.  Taxation

The name of the game in the tax world is to level the taxable income over the business life of the individual taxpayer.

Keep his income from being in 25% bracket one year, and 15% the next.

Utopia is keeping the individual in the 15% bracket (lowest) during his lifetime.

Therefore.........use vehicles, such as C corporations, to function as "holding bins", to hold income on a temporary basis until it can be squeezed into the personal return at the targeted bracket---- we use the 15% bracket as target.

With respect to deductions........always keep deductions as close to the business net income as possible, so more mileage is obtained from the same dollars of deductions.   Example.......... interest expense.  If money is borrowed personally to start up an S corp, the interest on that should be deductible as a direct deduction from the net S corp income..........but we see it on superseded returns often as an itemized deduction investment interest.  In many situations, merely moving the location of the deduction in the tax return results in more net deductions.

So, employee benefits that can be used as deductions within a C corp, that would not be available to the taxpayer if the business were not incorporated, would be getting some deductions close to the source, and in this case, obtaining deductions that would not otherwise be available.

2.  business cycles

Farming has a long production cycle, and can have a long sales cycle.......which results in a long calendar period in which economic forces can change severely.  Therefore farming needs a buffer vehicle that can absorb the ups and downs without causing severe changes in the tax rates.  C corps provide a 50K 15% bracket, 25% on the next 25K, and 34% on the next 25K------ so, 100K can be left inside the business, without incurring self employment taxes of about 15%.........at a tax cost of about 22500 for the 100K...........22%.

That money is after any salaries being paid to owners as employees.

If the cycle moves up........more money can be paid to employee to keep the taxable incomes of both returns "level".

If the cycle moves down.......... frankly, most likely a significant amount of money should be paid by C corp as salary in order to possibly throw the corp into a net operating loss, which can then be carried back/forward on a much more efficient basis as corp than as can be done as individual's NOL.

(Remember------- any salaries paid also carry a 15% FICA/social security tax with it.......and that cost has to be considered also.)

(Notice that the target is the management of the taxable income on the individual's return-------- using the corp as a buffer, a holding tank, to dip into when appropriate.)

3.  Internal financing.

If the personal return is "filled up to the desired level", then the residual can remain in the corp, to function as a low tax cost source of financing.

4.  employee benefits.

As noted above, using a C corp opens the gate to use as a small business person those benefits which the "big boys" use..........meals and lodging, medical expenses (but that is now up in the air due to ACA....which I hope those negative elements are overturned in the near future), term life insurance, etc etc.

5.  Getting out of a C corp.

Always lots of talk about the pitfalls of liquidating a C corp.  That is typically a comment made by someone who does not understand the liquidation procedures.........and most CPAs only slightly knowledgeable in tax can do enough reading in a day to understand how and when to do it to avoid the problems, or at least minimize them---- so cannot be avoided.

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I again reiterate------------ the structure I like is a C corp to hold operations, an S corp to hold the land in order to avoid the Self employment tax.

Any other structure will merely be a variation of those objectives.  For example, if a pile of brothers and sisters own the land, but only one is farming it..........it might be that those others insist on using a LLC taxed as a partnership to own the land.  Ok....so be it....cannot always have Utopia..... the rent paid to the partnership will be self employment income to the one who is also the producer....... to the extent of his NET share of the income.

The use of a LLC which is taxed as a partnership or S corp (or as single member LLC) is worthless for holding operations.

If the LLC elects to be taxed as S corp........then rents paid to it will avoid SE tax.  (But note...... the structure gets back to the one I specified due to the elections by the LLC.)

Rule of thumb.......... a C corp can be used nearly any time, but one has to justify, give a reason, defend the position, if using an S corp or LLC/partnership/LLC single member-non entity.

Of our fulltime farming clients......I can think of only one who is not incorporated........he is 74 years old, and has more money than God. He could sell out and move to AZ at any day.

Any of our clients who are farming and apparently plan to stay with it, especially those whose wife is working in town, are incorporated........just to keep the farm income away from the personal return, and to provide a large number of employee benefits during their child-raising years.  The internal financing is a big deal also------- being able to service bank debt with dollars that have not been depleted by self employment/FICA taxes.

Your tax people should be able to specifically delineate WHY they believe you should be incorporated.  If they cannot........then they might be right, but for very iffy reasons..........and you should probably talk to some other CPA firm.