In the general process of analyzing risk and determining a plan to mitigate it, it’s likely that you have considered a succession plan for your farm. This is prudent planning, because you want to have these critical decisions made before something happens to you.
When you don’t plan, the consequences can be disastrous for your family. Family members might be unsure of your intentions or unable to agree on the best course of action moving forward. One possible option when working through the estate planning for your farm is to evaluate the benefits of a Sub S corporation. There are positive and negatives associated with this structure, but it might be worth your time to discover whether this is the right fit for you and your farm.
Determining the right business structure for your farm has important implications for ownership now and in the future. One option for the farm owner who wants to have separate enterprises managed by multiple people in different generations is known as a Subchapter S corp.
One of the downsides of this structure is that a farm is only permitted one capital purchase deduction under Section 179, whereas two or three people with sole farm ownership would enable each of those individuals to claim the deduction.
However combining forces of multiple people in a Subchapter S does give some decision making abilities with regard to dividends. If the stockholders agree with the concept of paying out annual dividends, these would only get taxed once. This one-time taxation is different than how the dividends might be treated under a C corporation.
Another upside to choosing this route? If your farm is a livestock enterprise that has a need for a manager present each day, some of the housing and electrical costs could be rolled into the corporation in relation to deductions.
There are some things to keep in mind about steps you are required to take with an S corp. One such example is that an S corp needs to have a president, hold regular meetings, save written notes from those meetings, and maintain a corporate book. Each year, the farm manager is responsible for conducting an internal appraisal for any assets. This is critical for establishing the value per share over the course of the year.
Although all of the benefits mentioned above are certainly reason enough to consider a Subchapter S structure for your farm, one of the biggest benefits has to do with your estate planning. In the future, individuals with ownership have the opportunity to gift stock to children. Rather than passing on these shares as salary, some of them can even be gifted as “earnings”. This allows a farm owner to transfer the majority of ownership stock before he or she exits the business entirely or passes away.