Returning to the Farm 2005 Nebraska Farm Business, Inc. Tina Barrett – Executive Director

Nebraska Farm Business, Inc.  Services We Offer: Tax Planning Tax Planning Tax Preparation Tax Preparation W-2/1099 Preparation W-2/1099 Preparation Monthly Accounting Monthly Accounting Payroll Payroll Business Planning Business Planning Financial Analysis Financial Analysis

Nebraska Farm Business, Inc.  Our Averages Data Is Published and Distributed to Lenders, Senators, Educators, Farmers & More.

Net Farm Income Trend 2004 New Record NFI: $78,930

NFI vs. Family Living Trend 2004 Family Living Expense: $44,811 (Avg. of 145 Farms)

Net Farm Inc. vs Gov’t Pmts – Government Payments Exceed Net Farm Income

Net Farm Income vs. Taxes

Net Return Per Acre Trend Irrigated Corn, Nebraska Trend Net Return Per Acre, Including Labor & Management Charge.

So you think…. “All good things come to those who wait” Just try not filing your tax return, and see all the “good” things the IRS has waiting for you!

Returning to the Farm  Things to think about first: Do you want to farm together or farm together separately? Do you want to farm together or farm together separately? Do you want to make management decisions together or on your own?Do you want to make management decisions 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 operations with a new addition?Are you willing to risk financial stability of older operations with a new addition?

Returning to the Farm  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 non-farm heirs? How will estate planning effect both farm and non-farm heirs? Will government payment limitations be a problem? Will government payment limitations be a problem?

Returning to the Farm  If you will farm together separately: What entities will you choose? What entities will you choose? How will labor be shared? How will labor be shared? How will equipment be shared? How will equipment be shared? Will the farm-heirs be able to survive alone with the estate planning in place? Will the farm-heirs be able to survive alone with the estate planning in place?

Entity Selection Reasons for Entities 1. Estate Planning 2. Business Succession 3. Income Tax

Estate Planning  Maintain Cash Flow & Financial Security  Assure Equitable Split of Assets Among All Heirs  Minimize Estate Taxes  Concerns of Remarriage of Surviving Spouse

Business Succession  Team Approach to Management  “Power” Struggle  Fair Compensation  Expecting the Unexpected  Phased-Out Retirement

Income Tax  Savings Are Possible With Entities  Reduction in Self- Employment (SE) Greatest  Tax Savings Come With Accounting Costs

Choosing the Right Entity  Sole Proprietor  Partnership  LLC/LLP  S-Corporation  C-Corporation

Entity Comparison SE Tax Savings Liability Prot. Fringe Benefits Succession/ Estate Benefits Sole-Prop.NoNoSpouseNo Part/LLCNoLLCSpouseSome S-CorpYesYesNo Yes & No C-CorpYesYesYes

Sample Farm Family Planning  Jim and Jane Farmer Want to Know if They Should Have a Different Entity than a Sole Proprietor.  They Have Two Children and Do Not Itemize.

Tax Savings By Entity Sole P. Part.S-CorpC-Corp Farm Inc. $50,000$50,000$25,000$25,000 WageN/AN/A$25,000$25,000 Inc. Tax $3,350$3,350$3,350$3,970 SE Tax $7,064$7,064$3,532$3,532 Total Tax $10,414$10,414$6,882$7,502 Ret. Earn. $25,000 Div. Tax $1,250 Total Tax $8,752

Tax Savings By Entity Sole P. Part.S-CorpC-Corp Farm Inc. $100,000$100,000$35,000$35,000 WageN/AN/A$25,000$25,000 RentN/AN/A$40,000$40,000 Inc. Tax $12,630$12,630$12,630$10,850 SE Tax $13,659$13,659$3,532$3,532 Total Tax $26,289$26,289$16,162$14,382 Ret. Earn. $35,000 Div. Tax $3,900 Total Tax $18,282

Tax Savings By Entity Sole P.Part.S-CorpC-Corp Farm Inc.$150,000 $85,000$50,000 WageN/A $25,000$60,000 RentN/A $40,000 Inc. Tax$25,348 $20,130 SE Tax$14,998 $3,532$8,478 Total Tax$40,346 $28,880$28,608 Ret. Earn.$50,000 Div. Tax$7,500 Total Tax$36,108

Sample Farm Family Planning  Why would you choose a C-Corp? Remember, this example did not include things like the deduction of: Remember, this example did not include things like the deduction of: Health Insurance,Health Insurance, Medical Expenses,Medical Expenses, Retirement Plans,Retirement Plans, Other Fringe BenefitsOther Fringe Benefits

Example of Savings from Benefits Fringe Benefits: 1. Health Insurance - $10,000 / year 2. Medical/Prescription Costs - $4,500 / year 3. Retirement Plan - $3,000 / year Total Benefits: $17,500 / year

Tax Savings By Entity Sole P. Part.S-CorpC-Corp Total Inc. $100,000$100,000$100,000$100,000 Benefits$0$0$0$17,500 Adj. to Inc. $13,000$13,000$13,000$0 Inc. Tax $9,380$9,380$9,380$8,225 SE Tax $13,659$13,659$3,532$3,532 Total Tax $26,854$26,854$16,727$14,577 Ret. Earn. $35,000 Div. Tax $3,900 Total Tax $18,477

Tax Drawbacks to Entities  Loss of Step-Up in Basis Machinery contributed to a corporation goes in at your basis (No tax consequences) 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. Machinery in a corporation does not receive a step-up in basis at the time of death, the stock owned receives the step-up.

Tax Drawbacks to Entities  Loss of Step-Up in Basis Example: Example: FMV of Machinery = $500,000 FMV of Machinery = $500,000 Basis in Machinery = $200,000 (Amount Remaining to Depreciate) Basis in Machinery = $200,000 (Amount Remaining to Depreciate) If owned by individual at time of death, the surviving spouse inherits the machinery with a new basis = FMV and pays no tax upon the sale of assetsIf owned by individual at time of death, the surviving spouse inherits the machinery with a new basis = FMV and pays no tax upon the sale of assets

Tax Drawbacks to Entities  Loss of Step-Up in Basis Example: Example: FMV of Machinery = $500,000 FMV of Machinery = $500,000 Basis in Machinery = $200,000 (Amount Remaining to Depreciate) Basis in Machinery = $200,000 (Amount Remaining to Depreciate) If a corporation owns the machinery, it must pay tax on the sale of the assets and the individual must pay tax on the dividends to have use of the cash.If a corporation owns the machinery, it must pay tax on the sale of the assets and the individual must pay tax on the dividends to have use of the cash.

Entities & FSA  What Should You Keep In Mind Regarding FSA Payment Limitations: Sole-Proprietors each get payment limits Partnerships look to the number of partners S & C Corps are immediately consolidated into one payment limitation.

Entities & FSA  What Should You Keep In Mind Regarding FSA Payment Limitations: Payment Limitations Must Be Considered to Make Sure You Don’t Lose Payments! Or at least make sure the tax savings is worth losing the payments.

Entities & FSA  Remember: The Entity Should Have Significant Contribution of Active Personal Management And, It Should Not Exist Only To Receive More Payments (or to Avoid Tax)

Retirement Savings  With Reduced Social Security Payments – There Are Reduced Retirement Benefits  What if Social Security Is Not Longer Available?  Saving on Own Is Important

Retirement Savings  What Would Happen If You Contribute ~¼ of tax savings to Retirement Per Year (or $5,000)?

Retirement Savings Per Year Contribution $5,000 Return 7% Total At 65 $1,068,048$796,687$546,091$367,419 Per Year Income (20 yrs till 85) $53,402$39,834$27,305$18,371 * Still Have $12,377 Extra $’s For Reinvestment or Debt Reduction

Retirement Savings Per Year Contribution $10,000 Return 7% Total At 65 $2,136,096$1,593,374$1,092,182$734,838 Per Year Income (20 yrs till 85) $106,805$79,668$54,610$36,742 * Still Have $7,377 Extra $’s For Reinvestment or Debt Reduction

Successful Entity Organization C-Corp to Operate Farm Individual/Land Owner  Corporation Get Extra 15% Tax Bracket,  Individual Can Get All Medical, etc, Benefits Tax Free  Individual Taxpayer Pays on Wage and Rent Received.

Successful Entity Organization Partnershi p FatherSon  Partnership Can Own Machinery and Operate Farm.  Can Enter Partnership 80% - 20% and Switch Ownership Over Time,

Successful Entity Organization LLC To Own Machinery Sole- Proprietor  LLC Allows Shared Investment Of Machinery While Maintaining Separate Operations.  Income Split Between Individuals

Other Things to Remember  Adding Entities, Adds Bookwork,  Adding Entities also Costs Money: Legal Fees to Set Up Accounting Fees to Prepare Tax Returns  Adding Payroll, etc. Can Cause Headaches!

Professional Cost of An Entity Corporations Part/LLC’s Corporations Part/LLC’s Set Up Cost $500-$1,000 $500-$1,000 Business Return $500 $400 Each Individual $100 $100 Payroll Forms $50 N/A * Does Not Include Tax Planning (+ ~$150), Accounting ($420 – 1 st Set, $250 – 2 nd Set)

Nebraska Farm Business, Inc Touzalin Ave Suite 105 Lincoln, NE (402) 464-NFBI