A taxing ag taskNDSU program examines tax issues, retirement planning
By: Jonathan Knutson, Agweek
A taxing ag task
NDSU program examines tax issues, retirement planning
By Jonathan Knutson
Agweek Staff Writer
Planting, harvesting and marketing crops is complicated enough. Figuring out the tax ramifications just adds to the complexity.
The North Dakota State University Extension Service recently held is 21st annual Income Tax Management for Ag Producers session. The interactive video program, in which 11 sites across the state participated, sought to help farmers, tax preparers and others with year-end farm business decisions and retirement planning.
The presenters were Ann Makres with the Internal Revenue Service; Steve Eckroth with the Bismarck, N.D., office of the Eide Bailly CPA and business advisory company; Brenda Laub, a Valley City, N.D., CPA; Steve Troyer with the Fargo office of Eide Bailly; and Andy Swenson, farm management specialist with North Dakota State University in Fargo.
Passing on the farm
Laub’s presentation on using limited liability partnership in a farming operation drew considerable interest from attendees around the state. In her presentation, the LLP was treated as a landholding entity, not an actual farming entity.
Here’s a look at what she told attendees:
An LLP has at least one general partner and at least limited partner.
The general partner makes the decision, acts on behalf of the entity and generally is liable personally for the partnership debts. Income attributable to the general partner typically is subject to self-employment tax.
The limited partner, or partners, is liable for partnership debt to the amount of money or property contributed or owned by the partner. The limited partner typically makes few decisions and his or her earnings generally aren’t subject to self-employment tax.
Laub gave this example of how an LLP might work:
Two parents own land and contribute it the partnership, in a non-taxable event. “Dad” and “Mom” immediately gift a percentage of the partnership to each of their three children. “Dad” and “Mom” each have 1 percent ownership stakes as a general partner, and also each have 40 percent ownership stakes as a limited partner, for a total of 82 percent. The remaining 18 percent is divided among a farming son (6 percent). a nonfarm son (6 percent) and a nonfarm daughter (6 percent).
“Dad” and “Mom”, as general partners, continue to make the decisions and remain liable for everything associated with the partnership, including any loans, taxes and expenses associated with the land. The two parents also retain their limited partnerships interests, which may or may not be transferred to the children as time goes on.
LLPs are transitional tool
An LLP can be good way to transition the farm to the next generation, Laub says.
At some point in the example cited above, the son who farms will become general partner and begin making the decisions, with his siblings remaining as limited partners. The arrangement allows all of a farm couple’s children to have a financial interest in the farmland, while allowing the son who farms to control the land, Laub says.
Other benefits of the arrangement include:
Controlling the terms of transition — deciding in advance, for instance, what happens if one of the heirs dies.
Providing potential estate tax savings.
Providing a potential vehicle to shift income to children.
Providing an opportunity to manage some self-employment taxes.
Laub tells Agweek that “if one of the primary goals (of an LLP) is estate tax savings, then it would be used by people with a larger estate. However, if transition is the goal, it works for any size farmer.”
She says more people seem to be talking about LLPs, “probably because the farm population is aging, and transition is a bigger issue. This is just one way to do it, though — it doesn’t fit for everyone.”
IRS changes to note
Ag producers should be aware of a number of IRS provisions, say Makres, IRS senior tax specialist in Bloomington, Minn., and Eckroth, an Eide Bailly tax manager.
Perhaps the most important is Section 179 of the U.S. Tax Code. It allows business to immediately deduct the full expense of qualifying investments within certain limits.
The maximum deduction is $500,000 in 2011, falling to $139,000 in 2012.
Another tax-related change to note is that, beginning in 2011, employers must report compensation of $600 or more paid to foreign ag workers admitted temporarily into the United States on an H-2A visa.
However, employers aren’t required to withhold federal income tax from compensation paid to an H-2A ag worker. Employers should withhold federal income tax only if the worker and employer agree to do so.
Makres notes that the IRS web site contains a special section, the Agricultural Tax Center, devoted to ag tax issues.
“You’ll find most of the things you want there, “ Makres says to people with ag tax questions.
The information can be accessed by putting “Agricultural Tax Center” into the search area of www.irs.gov.
Tax planning ideas
The NDSU program included a list of “tax planning ideas for 2011 and beyond.”
Among the ideas:
Determine what crop insurance proceeds can be deferred. Prevented plant and hail crop insurance can be deferred, while revenue assurance and crop revenue crop can’t be.
Consider retirement funding and health care deductions. For example, in low-income years consider converting traditional Individual Retirement Accounts into Roth IRAs.
Consider estate tax. The questions to ask yourself include whether you’ve prepared an estate plan and whether it makes sense to transfer assets to the next generation to reduce estate taxes.