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Returning to the Farm Returning to the Farm 20052005
Nebraska Farm Business, Inc.Nebraska Farm Business, Inc.Tina Barrett – Executive DirectorTina Barrett – Executive Director
Nebraska Farm Business, Inc.Nebraska Farm Business, Inc. Services We Offer:Services We Offer:
Tax PlanningTax Planning Tax PreparationTax Preparation W-2/1099 PreparationW-2/1099 Preparation Monthly AccountingMonthly Accounting PayrollPayroll Business PlanningBusiness Planning Financial AnalysisFinancial Analysis
Nebraska Farm Business, Inc.Nebraska Farm Business, Inc. Our Averages Data Is Our Averages Data Is
Published and Published and Distributed to Distributed to Lenders, Senators, Lenders, Senators, Educators, Farmers & Educators, Farmers & More.More.
Net Farm Income TrendNet Farm Income Trend
-$20,000
$0
$20,000
$40,000
$60,000
$80,000
$100,00019
80
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2004 New Record NFI:2004 New Record NFI:$78,930$78,930
NFI vs. Family Living TrendNFI vs. Family Living Trend
-$20,000$0
$20,000$40,000
$60,000$80,000
$100,000
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Net Farm Income Family Living
2004 Family Living Expense: $44,811 (Avg. of 145 Farms)
Net Farm Inc. vs Gov’t PmtsNet Farm Inc. vs Gov’t Pmts
$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000$90,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Net Farm Income Gov't Pmts
1998-2001 – Government Payments Exceed Net Farm Income
Net Farm Income vs. TaxesNet Farm Income vs. Taxes
$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000$90,000
Net Farm Income Taxes
Net Return Per Acre TrendNet Return Per Acre Trend
-$80
-$60
-$40
-$20
$0
$20
$40
$60
93 94 95 96 97 98 99 '00 '01 '02 '03 '04
Irrigated Corn, Nebraska Trend
Net Return Per Acre, Including Labor & Management Charge.
So you think….So you think….
““All good things come All good things come to those who wait”to those who wait”
Just try not filing your tax return, Just try not filing your tax return, and see all the “good” things and see all the “good” things the IRS has waiting for you!the IRS has waiting for you!
Returning to the FarmReturning to the Farm
Things to think about first:Things to think about first: Do you want to farm together or farm together Do you want to farm together or farm together
separately?separately?• Do you want to make management decisions Do you want to make management decisions
together or on your own?together or on your own?• Will you share equipment or have separate lines?Will you share equipment or have separate lines?• Are you willing to risk financial stability of older Are you willing to risk financial stability of older
operations with a new addition?operations with a new addition?
Returning to the FarmReturning to the Farm
If you will farm together:If you will farm together: What entity will you choose?What entity will you choose? How will the labor and management be split?How will the labor and management be split? How will estate planning effect both farm and How will estate planning effect both farm and
non-farm heirs?non-farm heirs? Will government payment limitations be a Will government payment limitations be a
problem?problem?
Returning to the FarmReturning to the Farm
If you will farm together If you will farm together separately:separately: What entities will you What entities will you
choose?choose? How will labor be shared?How will labor be shared? How will equipment be How will equipment be
shared?shared? Will the farm-heirs be able Will the farm-heirs be able
to survive alone with the to survive alone with the estate planning in place?estate planning in place?
Entity SelectionEntity Selection
Reasons for EntitiesReasons for Entities
1.1. Estate PlanningEstate Planning
2.2. Business Business SuccessionSuccession
3.3. Income TaxIncome Tax
Estate PlanningEstate Planning Maintain Cash Flow & Maintain Cash Flow &
Financial SecurityFinancial Security Assure Equitable Split Assure Equitable Split
of Assets Among All of Assets Among All HeirsHeirs
Minimize Estate TaxesMinimize Estate Taxes Concerns of Concerns of
Remarriage of Remarriage of Surviving SpouseSurviving Spouse
Business SuccessionBusiness Succession Team Approach to Team Approach to
ManagementManagement ““Power” StrugglePower” Struggle Fair CompensationFair Compensation Expecting the Expecting the
UnexpectedUnexpected Phased-Out Phased-Out
RetirementRetirement
Income TaxIncome Tax Savings Are Possible Savings Are Possible
With EntitiesWith Entities Reduction in Self-Reduction in Self-
Employment (SE) Employment (SE) GreatestGreatest
Tax Savings Come Tax Savings Come With Accounting With Accounting CostsCosts
Choosing the Right EntityChoosing the Right Entity Sole ProprietorSole Proprietor PartnershipPartnership LLC/LLPLLC/LLP S-CorporationS-Corporation C-CorporationC-Corporation
Entity ComparisonEntity Comparison
SE Tax SE Tax SavingsSavings
Liability Liability Prot.Prot.
Fringe Fringe BenefitsBenefits
Succession/Succession/Estate Estate
BenefitsBenefitsSole-Prop.Sole-Prop. NoNo NoNo SpouseSpouse NoNo
Part/LLCPart/LLC NoNo LLCLLC SpouseSpouse SomeSome
S-CorpS-Corp YesYes YesYes NoNo Yes & NoYes & No
C-CorpC-Corp YesYes YesYes YesYes Yes & NoYes & No
Sample Farm Family PlanningSample Farm Family Planning Jim and Jane Farmer Jim and Jane Farmer
Want to Know if They Want to Know if They Should Have a Should Have a Different Entity than a Different Entity than a Sole Proprietor.Sole Proprietor.
They Have Two They Have Two Children and Do Not Children and Do Not Itemize.Itemize.
Tax Savings By EntityTax Savings By Entity
Sole P.Sole P. Part.Part. S-CorpS-Corp C-CorpC-CorpFarm Inc.Farm Inc. $50,000$50,000 $50,000$50,000 $25,000$25,000 $25,000$25,000
WageWage N/AN/A N/AN/A $25,000$25,000 $25,000$25,000Inc. TaxInc. Tax $3,350$3,350 $3,350$3,350 $3,350$3,350 $3,970$3,970SE TaxSE Tax $7,064$7,064 $7,064$7,064 $3,532$3,532 $3,532$3,532
Total TaxTotal Tax $10,414$10,414 $10,414$10,414 $6,882$6,882 $7,502$7,502Ret. Earn.Ret. Earn. $25,000$25,000Div. TaxDiv. Tax $1,250$1,250Total TaxTotal Tax $8,752$8,752
Tax Savings By EntityTax Savings By EntitySole P.Sole P. Part.Part. S-CorpS-Corp C-CorpC-Corp
Farm Inc.Farm Inc. $100,000$100,000 $100,000$100,000 $35,000$35,000 $35,000$35,000WageWage N/AN/A N/AN/A $25,000$25,000 $25,000$25,000RentRent N/AN/A N/AN/A $40,000$40,000 $40,000$40,000
Inc. TaxInc. Tax $12,630$12,630 $12,630$12,630 $12,630$12,630 $10,850$10,850SE TaxSE Tax $13,659$13,659 $13,659$13,659 $3,532$3,532 $3,532$3,532
Total TaxTotal Tax $26,289$26,289 $26,289$26,289 $16,162$16,162 $14,382$14,382Ret. Earn.Ret. Earn. $35,000$35,000Div. TaxDiv. Tax $3,900$3,900Total TaxTotal Tax $18,282$18,282
Tax Savings By EntityTax Savings By EntitySole P. Part. S-Corp C-Corp
Farm Inc. $150,000 $150,000 $85,000 $50,000
Wage N/A N/A $25,000 $60,000
Rent N/A N/A $40,000 $40,000
Inc. Tax $25,348 $25,348 $25,348 $20,130
SE Tax $14,998 $14,998 $3,532 $8,478
Total Tax $40,346 $40,346 $28,880 $28,608
Ret. Earn. $50,000
Div. Tax $7,500
Total Tax $36,108
Sample Farm Family PlanningSample Farm Family Planning Why would you Why would you
choose a C-Corp?choose a C-Corp? Remember, this Remember, this
example did not example did not include things like the include things like the deduction of:deduction of:
• Health Insurance,Health Insurance,• Medical Expenses,Medical Expenses,• Retirement Plans,Retirement Plans,• Other Fringe BenefitsOther Fringe Benefits
Example of Savings from Example of Savings from BenefitsBenefits
Fringe Benefits:Fringe Benefits:1.1. Health Insurance - $10,000 / yearHealth Insurance - $10,000 / year2.2. Medical/Prescription Costs - $4,500 / yearMedical/Prescription Costs - $4,500 / year3.3. Retirement Plan - $3,000 / yearRetirement Plan - $3,000 / year
Total Benefits: $17,500 / yearTotal Benefits: $17,500 / year
Tax Savings By EntityTax Savings By EntitySole P.Sole P. Part.Part. S-CorpS-Corp C-CorpC-Corp
Total Inc.Total Inc. $100,000$100,000 $100,000$100,000 $100,000$100,000 $100,000$100,000BenefitsBenefits $0$0 $0$0 $0$0 $17,500$17,500
Adj. to Inc.Adj. to Inc. $13,000$13,000 $13,000$13,000 $13,000$13,000 $0$0Inc. TaxInc. Tax $9,380$9,380 $9,380$9,380 $9,380$9,380 $8,225$8,225SE TaxSE Tax $13,659$13,659 $13,659$13,659 $3,532$3,532 $3,532$3,532
Total TaxTotal Tax $26,854$26,854 $26,854$26,854 $16,727$16,727 $14,577$14,577Ret. Earn.Ret. Earn. $35,000$35,000Div. TaxDiv. Tax $3,900$3,900Total TaxTotal Tax $18,477$18,477
Tax Drawbacks to EntitiesTax Drawbacks to Entities
Loss of Step-Up in BasisLoss of Step-Up in Basis Machinery contributed to a corporation goes Machinery contributed to a corporation goes
in at your basis (No tax consequences)in at your basis (No tax consequences) Machinery in a corporation does not receive a Machinery in a corporation does not receive a
step-up in basis at the time of death, the stock step-up in basis at the time of death, the stock owned receives the step-up.owned receives the step-up.
Tax Drawbacks to EntitiesTax Drawbacks to Entities
Loss of Step-Up in BasisLoss of Step-Up in Basis Example:Example:
FMV of Machinery = $500,000FMV of Machinery = $500,000 Basis in Machinery = $200,000 (Amount Remaining to Basis in Machinery = $200,000 (Amount Remaining to
Depreciate)Depreciate)
• If owned by individual at time of death, the If owned by individual at time of death, the surviving spouse inherits the machinery with a new surviving spouse inherits the machinery with a new basis = FMV and pays no tax upon the sale of basis = FMV and pays no tax upon the sale of assetsassets
Tax Drawbacks to EntitiesTax Drawbacks to Entities
Loss of Step-Up in BasisLoss of Step-Up in Basis Example:Example:
FMV of Machinery = $500,000FMV of Machinery = $500,000 Basis in Machinery = $200,000 (Amount Remaining to Basis in Machinery = $200,000 (Amount Remaining to
Depreciate)Depreciate)
• If a corporation owns the machinery, it must pay If a corporation owns the machinery, it must pay tax on the sale of the assets and the individual tax on the sale of the assets and the individual must pay tax on the dividends to have use of the must pay tax on the dividends to have use of the cash.cash.
Entities & FSAEntities & FSA What Should You Keep In What Should You Keep In
Mind Regarding FSA Mind Regarding FSA Payment Limitations:Payment Limitations: Sole-Proprietors each get Sole-Proprietors each get
payment limitspayment limits Partnerships look to the Partnerships look to the
number of partners number of partners S & C Corps are immediately S & C Corps are immediately
consolidated into consolidated into oneone payment limitation.payment limitation.
Entities & FSAEntities & FSA What Should You Keep In What Should You Keep In
Mind Regarding FSA Mind Regarding FSA Payment Limitations:Payment Limitations: Payment Limitations Must Be Payment Limitations Must Be
Considered to Make Sure You Considered to Make Sure You Don’t Lose Payments!Don’t Lose Payments!
Or at least make sure the tax Or at least make sure the tax savings is worth losing the savings is worth losing the payments.payments.
Entities & FSAEntities & FSA Remember:Remember:
The Entity Should Have The Entity Should Have Significant Contribution of Significant Contribution of Active Personal ManagementActive Personal Management
And, It Should Not Exist Only And, It Should Not Exist Only To Receive More Payments To Receive More Payments (or to Avoid Tax)(or to Avoid Tax)
Retirement SavingsRetirement Savings With Reduced Social With Reduced Social
Security Payments – Security Payments – There Are Reduced There Are Reduced Retirement BenefitsRetirement Benefits
What if Social Security What if Social Security Is Not Longer Is Not Longer Available?Available?
Saving on Own Is Saving on Own Is ImportantImportant
Retirement SavingsRetirement Savings What Would Happen What Would Happen
If You Contribute ~¼ If You Contribute ~¼ of tax savings to of tax savings to Retirement Per Year Retirement Per Year (or $5,000)?(or $5,000)?
Retirement SavingsRetirement Savings
25 30 35 40
Per Year Contribution $5,000 $5,000 $5,000 $5,000
Return 7% 7% 7% 7%Total At 65 $1,068,048 $796,687 $546,091 $367,419Per Year Income (20 yrs till 85)
$53,402 $39,834 $27,305 $18,371
* Still Have $12,377 Extra $’s * Still Have $12,377 Extra $’s For Reinvestment or Debt For Reinvestment or Debt ReductionReduction
Retirement SavingsRetirement Savings
25 30 35 40
Per Year Contribution $10,000 $10,000 $10,000 $10,000
Return 7% 7% 7% 7%Total At 65 $2,136,096 $1,593,374 $1,092,182 $734,838Per Year Income (20 yrs till 85) $106,805 $79,668 $54,610 $36,742
* Still Have $7,377 Extra $’s For * Still Have $7,377 Extra $’s For Reinvestment or Debt Reinvestment or Debt ReductionReduction
Successful Entity OrganizationSuccessful Entity Organization
C-Corp to Operate Farm
Individual/Land Owner
Corporation Get Extra 15% Tax Bracket,Corporation Get Extra 15% Tax Bracket, Individual Can Get All Medical, etc, Benefits Tax Individual Can Get All Medical, etc, Benefits Tax
FreeFree Individual Taxpayer Pays on Wage and Rent Individual Taxpayer Pays on Wage and Rent
Received.Received.
Successful Entity OrganizationSuccessful Entity Organization
Partnership
Father Son
Partnership Can Own Machinery and Operate Partnership Can Own Machinery and Operate Farm.Farm.
Can Enter Partnership 80% - 20% and Switch Can Enter Partnership 80% - 20% and Switch Ownership Over Time,Ownership Over Time,
Successful Entity OrganizationSuccessful Entity Organization
LLC To Own Machinery
Sole-Proprietor Sole-Proprietor
LLC Allows Shared Investment Of Machinery LLC Allows Shared Investment Of Machinery While Maintaining Separate Operations.While Maintaining Separate Operations.
Income Split Between IndividualsIncome Split Between Individuals
Other Things to RememberOther Things to Remember Adding Entities, Adds Adding Entities, Adds
Bookwork,Bookwork, Adding Entities also Adding Entities also
Costs Money:Costs Money: Legal Fees to Set UpLegal Fees to Set Up Accounting Fees to Accounting Fees to
Prepare Tax ReturnsPrepare Tax Returns Adding Payroll, etc. Adding Payroll, etc.
Can Cause Can Cause HeadachesHeadaches!!
Professional Cost of An EntityProfessional Cost of An Entity
CorporationsCorporations Part/LLC’sPart/LLC’s
Set Up Cost Set Up Cost $500-$1,000 $500-$500-$1,000 $500-$1,000$1,000
Business ReturnBusiness Return $500 $500 $400 $400Each IndividualEach Individual $100 $100 $100 $100Payroll FormsPayroll Forms $50 $50 N/A N/A
* Does Not Include Tax Planning (+ ~$150), * Does Not Include Tax Planning (+ ~$150), Accounting ($420 – 1Accounting ($420 – 1stst Set, $250 – 2 Set, $250 – 2ndnd Set)Set)
Nebraska Farm Business, Inc.Nebraska Farm Business, Inc.
3815 Touzalin Ave3815 Touzalin AveSuite 105Suite 105
Lincoln, NE 68507-1600Lincoln, NE 68507-1600(402) 464-NFBI(402) [email protected]@nfbi.netwww.nfbi.netwww.nfbi.net