Published on February 20, 2014
Agribusiness Tax Planning Patrick Mulherin, CPA Manager Smith Elliott Kearns & Company, LLC www.sek.com email@example.com (717) 263-3910
Firm Background: Founded in 1963 5 office locations (Chambersburg, Carlisle, Hagerstown, Hanover, Camp Hill) Locally owned and operated Large variety of traditional and non-traditional accounting and consulting services Traditional – tax preparation, tax planning, financial statement preparation, audits, business consulting Non-Traditional – retirement plan administration, payroll preparation, valuation services, business succession and estate planning, QuickBooks consulting, Peachtree consulting Community focus – volunteer work, fund raising, donation, scholarship Commitment to Excellence – client service, final product accuracy, level of consulting, honest, ethical
My Background: Originally from York County Graduated from Shippensburg December 2006 Internships with SEK & CO followed by full time position Work in Chambersburg Office on closely-held (or family-owned) businesses and individuals providing consulting, tax planning, tax preparation, and financial statement preparation Focus on agribusiness with a mix of other business segments Member of the Pennsylvania Institute of Certified Public Accountants and American Institute of Certified Public Accountants
Presentation Overview Focus on thinking about managing risks can help preserve cash flow along with managing the ability to transition a business internally to family or to external buyer Topics: Tax planning and management Entity structure and set-up Business transition
TAX PLANNING AND MANAGEMENT
TAX PLANNING AND MANAGEMENT Manage tax brackets effectively Try and avoid “peak and valley” tax years Consistency in paying some level of tax can be beneficial over time Trying to avoid taking tax deductions in a lower bracket and deferring income tax to a year with a higher bracket Utilize farm income averaging Allows for the spread of farm income over current year and three previous years Benefit is the ability to get more income taxed in the lower tax brackets (10-25%) Analyze benefit on year to year basis and can be elected yearly without issue Does not affect 15.3% self employment tax for sole proprietors , partners in partnerships, and members in an LLC Agribusiness is incredibly difficult to predict. So future income is tough to determine. However, think longer term when looking at options to lower taxable income.
TAX PLANNING AND MANAGEMENT Current U.S. Income Tax Brackets (Married filing jointly) 45.0% 40.0% 35.0% 30.0% 25.0% 2013 MFJ 20.0% 2012 MFJ 15.0% 10.0% 5.0% 0.0% Up to $17,850 $17,850$72,500 $72,500 $146,400 $146,400 $223,050 $223,050 $398,350 $398,350 $450,000 Over $450,000
TAX PLANNING AND MANAGEMENT Effectively planning for capital expenditures Ability to write off equipment in year of purchase (Section 179) Decreased from $500,000 (2013) to currently $25,000 (2014) 50% “Bonus” depreciation Currently eliminated Things to consider: Current year capital expenditures and how taxable income may change compared to prior years based on how aggressively assets were written off in the past Consult with advisor on ability to potentially amend returns to reduce depreciation to effectively lower overall tax bracket Consult with advisor about annual capital expenditures and what depreciation is available Team Meetings are great ways to discuss potential
TAX PLANNING AND MANAGEMENT Other Tax Planning Considerations Future of the Domestic Productions Deduction Many coop’s now pass through a relatively substantial deduction Tests for prepaid farm expenses (does not cover insurance and rents) Test 1: Must be purchase, not deposit Test 2: Made for a business purpose, not to avoid taxes Test 3: Must not result in material distortion of income Mixed expenses (business versus personal) Consider reasonable allocation of expenses that are for both business and personal Real estate taxes Utilities Insurances Professional fees Vehicle expenses Consider retirement plan
ENTITY STRUCTURE AND SET UP
ENTITY STRUCTURE AND SET UP Benefits of entities Setting your business up in a separate entity can provide future benefits Liability protection Protecting your personal assets in the event that a claim arises that goes above and beyond insurance coverage Business segregation Maybe it’s beneficial to separate pieces of your business up for future transition (i.e. real estate and operations) This segregation can help show outside parties profit levels and cash flow for potential sale of business segments Valuation discounts Allows for discounting the value of the entity Can make transition to next generation more affordable Can help better manage potential estate issues
ENTITY STRUCTURE AND SET UP Types of entities available General partnerships Doesn’t provide the liability protection of other options Limited partnerships Needs to have at least 1 general partner that is responsible for the entity and it’s liabilities Limited liability companies Provides personal liability protection for all members All income from business operations is subject to selfemployment taxes S-Corporations Can potentially help limit, but not eliminate, self-employment tax Has to have a payroll and owners working in business should be on payroll making a competitive wage C-Corporations Limited use in today’s tax regulations due to double taxation
ENTITY STRUCTURE AND SET UP Steps to Consider with an Advisor Is there a need for an entity? What is purpose of entity? (i.e. transition, liability protection, etc.) What is the future of the entity? How many partners owners are going to be involved? How will the entity be funded initially? Transition of agricultural land into an entity no longer causes 1% transfer tax
BUSINESS TRANSITION Difficulty in transition an agribusiness entity Identifying successors Setting a price in coordination with desired level of cash flow in retirement Considering gifting and the overall effect for the individual gifting Giving up control
BUSINESS TRANSITION Identifying Successors For agribusiness this can be relatively easy depending on the involvement of family (sons, daughters, brothers, nephews, nieces, etc.) Consider the traits and abilities of those that would be taking on the operation of the business Consider the ability of those individuals to be trained and what level of involvement you desire going forward to help with training However, if a family succession doesn’t appear to be an option, then what? Starting relatively early to seek out businesses or individuals that would have interest in purchase/rent arrangement for land, buildings, equipment, livestock, etc. Consider surrounding farmers, contact vendors that have frequent contact with other agribusiness operators Accountant Loan officer Insurance broker
BUSINESS TRANSITION Setting a Price in Coordination with Desired Level of Cash Flow in Retirement Determining what you need in retirement will help determine what type of options there are for transition Selling the farm, equipment, inventory, and livestock Cash Sale - secures the cash in the year of sale and then has to be managed to derive a rate of return in retirement years. This also causes the most significant tax liability in a single year Seller financed – limits the tax liability (only on real estate and buildings), puts seller at risk of future default on note, needs to have established legal documents (mortgage, notes, etc.) to help cover the seller Renting the farm, equipment, and livestock Leases can leave the retiring party at risk of losing lessor and therefore the stream of income It can manage taxes to a certain degree
BUSINESS TRANSITION Setting a Price in Coordination with Desired Level of Cash Flow in Retirement Piecemeal sale Selling certain assets and renting other assets for purchase over time or at a later date This option can have benefits for both sides of the transaction. Cash flow can be managed for the buyer to a level that makes sense while still gaining ownership of certain pieces of the operation or real estate Seller can limit exposure by getting piece of business sold financed by third party while renting remaining pieces of business There is plenty of flexibility to figure out what can work for both parties when after a successor is identified. Price and rent both need to be considered by the buyer based on historical performance of the company and
BUSINESS TRANSITION Considering gifting and the overall effect on the individual gifting Gifting can help bridge the cash flow gap for family transitions Any gift over $14,000 of value in a year needs a tax return to be filed No tax paid until over $5,340,000 of gifts. Each gift over the annual limit reduces the individuals future estate exemption and potentially exposes them to estate tax Estate exemption is $5,340,000 for both husband and wife and is portable currently Gifting gives successor the tax attributes of the asset at the time of the gift. (i.e. the successor doesn’t get any future tax benefit for the value that was gifted)
BUSINESS TRANSITION Giving up Control This is the hardest part of any business transition when an owner has been in control for many years The emotions of losing control and watching somebody run your operation differently then you can be difficult Family transitions can be even harder then third transitions or sales because of the emotions It’s important to be surrounded by a team of advisors that is looking out for your best interest and can be completely impartial if representing both sides of the transaction Thoughts that may help: Begin training early Slowly include those identified in business level decisions and meetings Slowly transition work load responsibilities to that person to allow for a smoother transition at retirement Be available for consulting after transition but allow for growth and changes within the business after retirement
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