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
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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
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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.
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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
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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