February 25, 2012   Lincoln, NE
Business Structures
Choices of Entities•   Sole Proprietor•   Partnership•   LLC / LLP•   S - Corporation•   C - Corporation
Choosing The Right Entity• Sole Proprietor     Files a Schedule F (On your Individual Tax Return)•   Partnership•   LLC /...
Sole ProprietorshipPros• Most Common Entity• Easy to Form, Easy to Quit• Easiest Record Keeping Requirement
Sole ProprietorshipCons• Single Member Entity• No Liability Protection• Pays SE on All Income
Choosing The Right Entity•   Sole Proprietor• Partnership     Historically the most common entity for multiple members   ...
PartnershipPros• Easy to Form, Easy to Quit• Simple Way to Split Income and Expenses• Easier Record Keeping (No Payroll), ...
PartnershipCons• No Liability Protection for General Partners• Pays SE on All Income• Can Not Provide Tax Free Benefits to...
Choosing The Right Entity•   Sole Proprietor•   Partnership• LLC/LLP     Considered a disregarded entity by the IRS     ...
Limited Liability Company (LLC)Pros• Some Liability Protection for All Partners• Easy to Form• Almost All Benefits of a Pa...
Limited Liability Company (LLC)Cons• Pays SE on All Income• Can Not Provide Tax Free Benefits to Partners• Considered “1 P...
Choosing The Right Entity•   Sole Proprietor•   Partnership•   LLC/LLP• S-Corporation     Files separate tax return on fo...
S - CorporationPros•   Provides “Corporate Veil” to Protect Liability.•   Can Bifurcate Income to Limit SE Taxes     Pay ...
S- CorporationCons• Entity Debt > Basis Limits Deductions• Tax Liability Due at Dissolution• Benefits Not Allowed for Empl...
Choosing The Right Entity•   Sole Proprietor•   Partnership•   LLC/LLP•   S-Corporation• C-Corporation    • Files Separate...
CorporationPros• Provides “Corporate Veil” to Protect Liability.• Owners Receive Benefits• SE Tax Limited to Wage• Extra 1...
CorporationCons• Retained Earnings Double Taxed on Liquidation• Cash Doesn’t Easily Flow Between Individual and  Corp• Rec...
Why Would You Change?•   Tax Reasons•   Cooperative Farming•   Generational Transfers•   Estate Planning•   Legal Protection
Why Would You Change?• Tax Reasons   Mainly Saving SE Taxes      S & C Corps: Pay yourself a reasonable wage(mandatory) ...
Why Would You Change?•   Tax Reasons• Cooperative Farming (Shared resources/operation)     Share Operation     Share Equ...
Why Would You Change?•   Tax Reasons•   Cooperative Farming (Shared resources/operation)• Generational Transfers     Isol...
Why Would You Change?•   Tax Reasons•   Cooperative Farming (Shared resources/operation)•   Generational Transfers• Estate...
Why Would You Change?•   Tax Reasons•   Cooperative Farming (Shared resources/operation)•   Generational Transfers•   Esta...
When To Change?• For Income Taxes?   Net Farm Income is consistently $100,000 for MFJ• A change to the business   A chil...
When’s To Change?• Liability issues change    Livestock operations    Net worth is at a point where insurance is not suf...
Potential Pitfalls - S-Corp• Possible legislation to make all earnings from an S-  Corp subject to Self-Employment Taxes  ...
Pitfalls - C-Corp• Double Taxation:   Earnings from C-Corp belong to the corp   Only way to have access personally is th...
Tax Drawbacks to Entities• Loss of Step-Up in Basis    Machinery contributed to a corporation goes in at your     basis (...
Nebraska Farm Business, Inc           3815 Touzalin Ave                Suite 105        Lincoln, NE 68507-1600            ...
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Taxes and Finance: Structuring Your Horse Business to Succeed

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A presentation from the Equine Business Conference presented by Michigan State University, University of Minnesota, University of Nebraska, and Iowa State University, and partly funded by the North Central Regional Center for Rural Development. Presenter: Michelle Greenlee, Farm Financial Consultant.

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Taxes and Finance: Structuring Your Horse Business to Succeed

  1. 1. February 25, 2012 Lincoln, NE
  2. 2. Business Structures
  3. 3. Choices of Entities• Sole Proprietor• Partnership• LLC / LLP• S - Corporation• C - Corporation
  4. 4. Choosing The Right Entity• Sole Proprietor  Files a Schedule F (On your Individual Tax Return)• Partnership• LLC / LLP• S - Corporation• C - Corporation
  5. 5. Sole ProprietorshipPros• Most Common Entity• Easy to Form, Easy to Quit• Easiest Record Keeping Requirement
  6. 6. Sole ProprietorshipCons• Single Member Entity• No Liability Protection• Pays SE on All Income
  7. 7. Choosing The Right Entity• Sole Proprietor• Partnership  Historically the most common entity for multiple members  Files a 1065 Form (Separate Tax Return)• LLC/LLP• S-Corporation• C-Corporation
  8. 8. PartnershipPros• Easy to Form, Easy to Quit• Simple Way to Split Income and Expenses• Easier Record Keeping (No Payroll), BUT The Books Must Balance.
  9. 9. PartnershipCons• No Liability Protection for General Partners• Pays SE on All Income• Can Not Provide Tax Free Benefits to Partners
  10. 10. Choosing The Right Entity• Sole Proprietor• Partnership• LLC/LLP  Considered a disregarded entity by the IRS  Can Elect to be taxed as a partnership or corporation  No tax benefit to electing a corp status over just being a corp.• S-Corporation• C-Corporation
  11. 11. Limited Liability Company (LLC)Pros• Some Liability Protection for All Partners• Easy to Form• Almost All Benefits of a Partnership
  12. 12. Limited Liability Company (LLC)Cons• Pays SE on All Income• Can Not Provide Tax Free Benefits to Partners• Considered “1 Person” for FSA Payments
  13. 13. Choosing The Right Entity• Sole Proprietor• Partnership• LLC/LLP• S-Corporation  Files separate tax return on form 1120-S  Separate entity, income flows through the corp tax return to the personal return.• C-Corporation
  14. 14. S - CorporationPros• Provides “Corporate Veil” to Protect Liability.• Can Bifurcate Income to Limit SE Taxes  Pay yourself rent for land, buildings, machinery held personally  Pay yourself a wage (mandatory)• All Income Flows Through Shareholders to Limit Retained Earnings
  15. 15. S- CorporationCons• Entity Debt > Basis Limits Deductions• Tax Liability Due at Dissolution• Benefits Not Allowed for Employee Owners of > 2%
  16. 16. Choosing The Right Entity• Sole Proprietor• Partnership• LLC/LLP• S-Corporation• C-Corporation • Files Separate Tax Return on form 1120 • Pays tax on the income
  17. 17. CorporationPros• Provides “Corporate Veil” to Protect Liability.• Owners Receive Benefits• SE Tax Limited to Wage• Extra 15% Tax Bracket
  18. 18. CorporationCons• Retained Earnings Double Taxed on Liquidation• Cash Doesn’t Easily Flow Between Individual and Corp• Record Keeping Work Increases.
  19. 19. Why Would You Change?• Tax Reasons• Cooperative Farming• Generational Transfers• Estate Planning• Legal Protection
  20. 20. Why Would You Change?• Tax Reasons  Mainly Saving SE Taxes  S & C Corps: Pay yourself a reasonable wage(mandatory)  Pay SE tax only on the wage.  Pay yourself rent on land, building, and machinery held personally  No SE tax on rent  Some Income Tax Savings C-Corp  2012 pay capital gains tax on dividends  Tax free benefits
  21. 21. Why Would You Change?• Tax Reasons• Cooperative Farming (Shared resources/operation)  Share Operation  Share Equipment  Share Land• Generational Transfers• Estate Planning• Legal Protection
  22. 22. Why Would You Change?• Tax Reasons• Cooperative Farming (Shared resources/operation)• Generational Transfers  Isolate Operational Unit  Share Equipment  Gift/Purchase Shares over Time• Estate Planning• Legal Protection
  23. 23. Why Would You Change?• Tax Reasons• Cooperative Farming (Shared resources/operation)• Generational Transfers• Estate Planning  Minority Discounts  Gift/Purchase in Partial Amounts• Legal Protection
  24. 24. Why Would You Change?• Tax Reasons• Cooperative Farming (Shared resources/operation)• Generational Transfers• Estate Planning• Legal Protection  Insurance is no longer sufficient  Operation is more at risk
  25. 25. When To Change?• For Income Taxes?  Net Farm Income is consistently $100,000 for MFJ• A change to the business  A child returning to the farm  A new entity or enterprise added
  26. 26. When’s To Change?• Liability issues change  Livestock operations  Net worth is at a point where insurance is not sufficient.• Reaching Net Worth levels that need an estate plan.  Individuals with net worth’s over $5 million ($10 million if married) For 2012 only (Returns to $1 million each in 2013)
  27. 27. Potential Pitfalls - S-Corp• Possible legislation to make all earnings from an S- Corp subject to Self-Employment Taxes  Negates almost all benefits to S-Corp status.• Regardless of action taken by Congress to change this, the issue of “Reasonable Wage” has been a HOT audit area.  MUST be paying at least some wage!• Must have basis to take money out of the corporation.  Problem if the corporation is not profitable.
  28. 28. Pitfalls - C-Corp• Double Taxation:  Earnings from C-Corp belong to the corp  Only way to have access personally is through dividends (ordinary income after 2012) or wages (subject to employment taxes)  Dissolution of entity is expensive with corp paying tax on sale of assets and double taxation.  Potential tax penalty if retained earnings become “too high” inside the corp. Not to hard in agriculture to explain that we are saving for investment
  29. 29. Tax Drawbacks to Entities• Loss of Step-Up in Basis  Machinery contributed to a corporation goes in at your basis (No tax consequences)  Machinery in a corporation does not receive a step-up in basis at the time of death, the stock owned receives the step-up.
  30. 30. Nebraska Farm Business, Inc 3815 Touzalin Ave Suite 105 Lincoln, NE 68507-1600 (402) 464-NFBI info@nfbi.net www.nfbi.net
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