My Generation

Should You Incorporate Your Farm?

With farm income down in 2015, here are a few questions to ask yourself if you're considering incorporating your farm.

Year end. It's a good time on the farm. (Please read with sarcasm.) Always followed, in terms of popularity of course, with tax season. Which is almost where we're at now.

For our 2014 year-end, the rush and flurry of Christmas preparations met the rush and flurry of number crunching, of cash flows and balance sheets and meeting with the accountant. This year, our accountant tacked on an extra meeting: legal advice regarding incorporation. Over the years, we've batted around the idea of forming a corporation. Is this the year? Will it save us anything? What about liability? Are the tax benefits substantial enough to offset the extra fees ad hassle? What I'm saying is, it's an ongoing conversation, for a lot of farm families.

In our particular case, we're not looking to incorporate until we have to. Fortunately, Dwight Raab agrees with that tactic.

Raab is head of the Illinois Farm Business Farm Management Association, so he has the opportunity to see a lot of farm books and to aggregate those numbers into solid comparisons. He harkens back to an old FBFM colleague who used to say of incorporating, "Look for reasons not to do it, rather than reasons to do it. Once you do it, it's hard to undo – especially if it's a C corporation."

In our situation, we're looking at an S corporation, which would provide savings on self-employment tax, if not on actual income tax. (Self-employment tax savings come because the corporation pays your salary.) Both our accountant and our attorney recommend seriously considering an S corporation when you have $45,000 to $50,000 in earned income on your Schedule F. "That's a good time to start looking," says our attorney, Steve Holland.

Holland handles farm and small business legal matters in our corner of the world, and has done his fair share of work with farm business. "Some people want to incorporate because, 'I want to be a corporation.' Don't do it for that reason," he advised.

Raab adds that sometimes a farm business will incorporate to limit liability. "Say you have a trucking business that involves liability, like a dozen trucks running down the road. You could carve out an LLC for trucks, and limit liability to that entity."

S corporations will still provide limits of liability, without the tax bracket burden of a C corp – the type of corporation many farms entered into during the 1970s and '80s, when they chose to incorporate. C Corps are much harder to get out of. Today, S corps are much more flexible, with many of the same benefits.

Raab says, "An S corporation is kind of a partnership with limits of liability."

Like anything, S corps have their downsides. In Illinois, you'll pay a $500 filing fee, and a $500 annual fee. You'll file an extra tax return, and you'll have to learn to operate with more structure. Say, for example, you go to put new tires on the truck and only have the corporation checkbook with you. You can't use it.

In the end, we decided this was not the year to incorporate our farm. Lower grain prices mean a lower net income, both in 2014 and 2015. The same may be true for a lot of us.

How about you? Is your farm incorporated or are you thinking about it? Comment below or drop me an email with your questions, concerns or plans. 

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