C3B—Lancaster Farming, Saturday, March 29,1980 CPA weighs alternatives in farm structure BY CURT HAULER HARRISBURG - The decision to form a part nership or corporation has implications on tax returns for that farm for years to come. Even if taxes are not the sole consideration, the fate of future generations on the farm may be determined by how wisely the farm owner of today provides for the farming generations of the future. Steven M. Hoffman, a certified public accountant / On being a * arm W^6 <jj -v i .£ n g other v hazards -V v V Joyce Bupp Over the course of the past several years, we’ve been honored with the receipt of literally hundreds of pieces of postal correspondence. Tempering the discovery that we are so desirable to the signers of these letters is the reality that most of the stuff can be described at best as “junk mail.” With last week’s shipment of goodies came an in vitation from the prestigious George Washington University in the nation’s capitol. On the gold-colored flyer was a registration form and invitation to the ownei operator to pursue a con tinuing engineering education in a three-day, $485 advanced course titled; “Analysis of variance for data having unequal num bers of observations in the subclasses ” While the various in dividuals with this operation have accumulated many years of assorted engineering-type ex perience, none of it comes with a B.S. degree. We in clude what could loosely be labeled an agriculture engineer, a mechanical engineer, a couple of volunteeer top-notch general fn-it engineers and, of course, a domestic engineer. Nevertheless, pursuing this advanced study might help us all better understand the engineering principal of unequal numbers that LvVj LIQUID nS PLANT FOOD 9-18-9 Starter ALPINE Foliar Feed • Balanced formula of trace elements • Immediate availability of nutrients • A neutral chlorine free product will not rust or corrode equipment March Base Price $2.55 Delivered Volume Discounts MERVIN M. KREIDER Frystown, Pa. 717-933*8943 and manager of the Harrisburg office of Peat, Marwick, Mitchell and Company, says there are pros and cons to each of the three typical farm struc tures- individual ownership, partnership, and in corporation. As an individual, a farmer can be sole owner of the farm business and its assets As a result, that individual is taxed on the total income from his operation. This could be subject to some extremely high rates, confront and confound us daily. For instance, there’s the case of the 40 by 30 inch calf which manages to escape regularly through the 14 by 12 inch head-hole in the welded steel front of the calf pen stall. Would that be what you call a variance of data of unequal numbers 7 Or, what about the con trary cow that persistently wedges her 24 by 12 inch head under the 3 inch clearance beneath the pasture fence, even though the grass is just as green on the inside? Other problems of unequal numbers could also stand some analysis. Like how can a I/30th acre of an un farmable rock pile produce three acres worth of weeds’ And what engineering data supports the unequal numbers of the 88 square inches of shoe sole that regularly tracks 197 square inches of yucky mud on my kitchen floor? Unfortunately, my analysis of the data brings me to the observation that this advanced course is offered in early June, when all the unequal numbers of subclasses on this farm will be involved m wrapping up the first session of haymaking. Confidentially, I’d be happy to settle for knowing what in the world the title of the course means. Hoffman said. Individual tax rates are graduated and go as high as 70 percent. Only the net amount of income after taxes is available for reinvestment in the farm or to meet in dividual expenses. The primary advantage of the individual ownership of a farm business is simplicity m paying only one tax the first tune around. Partnership is not a separate taxable entity, but the earnings of the partners pass through to the in dividuals along with the credits and deductions. The assets of the business are jointly owned by the partners and, again, only one tax is paid. Losses can also be passed through. One of the major ad vantages of a family part nership is the profits from a farm operation can be spread among the members of the partnership rather than being all bunched m the parents’ tax return, Hoff man said. This avoids the need to pay tax at the highest tax rates. But, he cautioned, a partnership can not be formed just to spread in come. It has to have some sort of economic reality, and the partners have to own a share m the partnership. The disadvantages to a partnership include unlimited liability, the same as with an individually owned operation. Normally, upon the death of one partner, the part nership disolves. And a further disadvantage may be that the fiscal year has to be the same as that of the general partners, he said. The third form available is the corporation. A corporate farm’s assets are owned by the cor poration and the individual owns shares of stock. In essence, the individual has no direct ownership, but the ownership is represented by the share of stock he owns m the corporation. It is possible to have a corporation with an in dividual owning the one and only share of stock. POULTRYMEN MUSHROOM Growers Curtis Engine & Equipment, Inc. 6120 Holabtrd Avenue Baltimore, Maryland 21224 (301) 633 5161 (800) 638 4923 Toll Free A corporation is regarded as a separate taxable entity for federal tax purposes. So the individual, theoretically, is not responsible for paying the tax of the corporation, he said. The individual generally is not liable for the debts of the corporation, either. The maximum corporate tax rate is 46 percent of taxable income over $lOO,OOO, so there is a rate differential between cor porate and personal taxation that could favor the cor porate farm. Salaries paid to the owner and shareholders can be deductions for the cor poration. The corporation has good continuity if one member of the corporation dies, it does not spell the end to the corporation. If a partner dies, a part nership has to be dissolved. There is flexibility in compensation, too. Corporate ownership is Curtis can provide the power you need for most electrical needs... 24 hours a day from the following locations— RENTAL and RENTAL PURCHASE PLANS are available for Standby Electrical Systems to protect you from financial loss. Our programs are tailored to meet your individual budget! more readily adaptable to a gift-giving program. It is easier, for estate planning purposes, to give away a few shares of stock than it would be to break off a section of land or a physical part of the farm operation. Also, a corporation can adopt a different fiscal tax year than that for the owners There is one tax election to be made for a corporation called Subchapter S which allows that corporation to be taxed similarly to a part nership. That is, the income or loss is passed through to the owners. Also, the sale of stock in a corporation is generally viewed as a capital gam. And 60 percent of a capital gam is excluded from tax, whereas all of a normal gam is taxed Sale of an individually owned farm or a farm partnership generally results in ordinary mcome The primary disadvantage of a corporation is double taxation. The corporation pays tax. And if the in dividuals want to participate in the earnings of the cor poration, and they can’t be paid out as salary, then the corporation has to pay a dividend. Dividends are not deductable by corporations and taxes have to be paid by individuals on dividends received. Among other disad vantages Hoffman pointed our are the added com plexity of a corporation’s tax returns and the need for a bit more record keeping. But there is more to consider than just tax ad vantages when deciding whether or not to form a partnership or corporation. Business and personal goals must be reviewed, then based on that, a farmer cam! decide on what form ot' operation to have, Hoffman concluded
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