Tax Planning

A Comparison of Business Entities Available to Ohio Farmers

By: Robert Moore, Barry Ward, OSU Extension

Ohio farmers have many choices when selecting a business entity for their farming operations. Choosing the right entity is important, as it can impact issues such as how the business functions, ownership rights, personal liability, and taxation. What should a farmer consider when deciding which type of entity to use for a business? We provide an overview of business entities used for farm operations in this bulletin, compare ten important factors to consider when making the entity selection decision, and highlight the advantages of using a formal business entity. A Business Entity Comparison Chart at the end of the publication summarizes entity characteristics. As with all legal issues, consultation with an attorney is critical to making a successful decision.

Types of business entities

Sole Proprietorship. A Sole Proprietorship is a business owned by a single person who is referred to as the “sole proprietor.” The sole proprietor and the business are one and the same—there is no separate legal business entity. The sole proprietor owns all business assets, is responsible for all liabilities, and reports income as individual income.

Partnership. A partnership exists when two or more individuals or “partners” jointly own and conduct a business for profit. A “General Partnership” consists of partners who each have management authority and personal liability for the partnership and who report income from the partnership as individual income. A different type of partnership, the “Limited Partnership,” allows investors to enter a partnership as “limited partners” without involving them in management and exposing them to personal liability for the partnership.

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Characteristics of Beginning Farmers in Ohio and Potential Impact of the Ohio Beginning Farmer Tax Credit Program

By: PhD students Xiaoyi Fang and Zhining Sun and Professor Ani Katchova, Farm Income Enhancement Chair, in the Department of Agricultural, Environmental, and Development Economics (AEDE), and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County

Click here to access the PDF version of this article that includes figures

 

Highlights

  • Ohio’s new and beginning farmers are individuals who intend to enter the farming industry or have less than ten years of experience as a farm owner/operator in Ohio.
  • Ohio’s new and beginning farmers compared to established farmers, tend to be younger, operate smaller farms, and less likely to state farming as their primary occupation.
  • The Ohio Beginning Farmer Tax Credit Program supports new and beginning farmers by providing income tax credits to: 1) beginning farmers who attend a financial management program, and 2) landowners that sell or rent farmland to beginning farmers.

Continue reading →

Federal Legislation Introduced to Address Farm Estate Taxes

Source: Robert Moore

On July 26, 2023, Representatives Jimmy Panetta of California and Mike Kelly of Pennsylvania introduced legislation related to farm estate taxes.  The proposed bill seeks to increase the limit on the deduction that can be taken by farmers under Section 2032A of the Internal Revenue Code (IRC).  The 2032A provision in the IRC allows farmers to value their land at agricultural value, rather than fair market value.  However, the current law limits the deduction to $1.16 million.  This relatively small deduction can limit the usefulness of 2032A for some farm estates.

Consider the following example:

Farmer’s estate includes 500 acres with a fair market value of $5,000,000.  The agricultural value, allowed by 2032A, is $4,500/acre or $2,250,000.  The difference between the fair market value and the agricultural value is $2,725,000.  So, by using 2032A valuation, the land value can be reduced by $2,725,000.  However, 2032A limits the deduction to $1,160,000.  Therefore, Farmer’s estate can actually use less than ½ the reduction in land value.

The newly introduced legislation would increase the 2032A deduction limit to the federal estate tax exemption, currently $12,900,000.  Applying the proposed legislation to the above scenario, Farmer’s estate would be able to deduct the entire $2,725,000.

The farm value of farmland is determined by a formula included in the IRC.  The value is the net cash rent of comparable land less real estate taxes divided by the Farm Credit System Bank interest rate, which is 4.57% for a 2022 Ohio estate.  Let’s assume the fair market cash rent for a farm is $220/acre less $50/acre for taxes.  Dividing by the interest rate, we get a value of $3,720/acre.  The 2032A rate (farm value) is usually 1/3 to ½ of the fair market value. Continue reading →

Not All Trusts Protect Assets

By: Robert Moore

How Do Retirees Define A 'Comfortable Retirement' And Should That Matter To You?

A common misperception is that all trusts protect assets from creditors, lawsuits, and nursing homes.  While some trusts do protect assets, many trusts do not.  In fact, most trusts are not designed to protect assets but instead to only transfer assets at death.  Knowing the difference between the different types of trusts is important to ensure that your trust meets your expectations for asset protection.

There are generally two different types of trusts – revocable and irrevocable.  A revocable trust is the typical estate planning trust most people use.  Because the revocable trust can be changed and assets transferred into and out of the trust, it provides no asset protection.  Essentially, if the owner/grantor can access the assets of the trust, then so can creditors.  If you can make changes to your trust and transfer assets in and out of the trust, you probably have a revocable trust.

An irrevocable trust can protect assets.  The concept of an irrevocable trust is to establish a trust that cannot be changed (with a few exceptions), transfer assets to the trust and then relinquish the right to withdraw the assets back out of the trust.  Additionally, someone else serves as the trustee to manage the trust assets.  Since the original owner of the assets no longer has access, control, or ownership of the assets, then creditors cannot access them.

It is important to keep in mind the five-year lookback rule for Medicaid.  This rule causes ineligibility for Medicaid for gifts that were made within five years of Medicaid application.  Due to this rule, establishing an irrevocable trust to protect assets from nursing home costs must be done well before the assets become at risk.

While an irrevocable trust is useful to protect assets, the irrevocable nature of the trust is a significant negative feature.  Once the irrevocable trust is established and the assets transferred, it cannot usually be undone.  Even if circumstances or goals change over time, the irrevocable trust stays in place and the assets stay in the trust.  A revocable trust, on the other hand, is flexible and can be changed as circumstances and goals change.

Sometimes a trust will include “revocable” or “irrevocable” in its name, making it obvious the type of trust.  However, many trusts do not indicate in the name if it is revocable or irrevocable.  In that case, the trust document must be reviewed to determine the type of trust.  Typically, within the first few paragraphs of the trust document, the trust will be clearly identified as either revocable or irrevocable.

Some estate plans include both a revocable and irrevocable trust.  Assets to be protected are transferred to an irrevocable trust and assets the owner wishes to retain control over are transferred to a revocable trust.  Having two trusts increase the costs of both setup and administration but it is an option for many people.

Anyone with a trust should verify the type of trust they have.  It is common that someone believes their assets are protected by their trust only to find out too late that they actually have a revocable trust and their assets are subject to nursing home costs.  A revocable trust can be converted to an irrevocable trust at any time prior to death.  If there is any doubt as the type of trust, review the trust with your attorney to be sure it meets your estate planning and asset protection goals.

Your Trust and Retirement Accounts

By: Robert Moore

How Do Retirees Define A 'Comfortable Retirement' And Should That Matter To You?

Revocable trusts are an important estate planning tool that is utilized in many estate plans.  Most assets can be held in a revocable trust but there are exceptions.  One such exception is retirement accounts like an IRA, 401k or 403b.  These types of accounts should not be owned by a trust and a trust should only be the beneficiary in limited circumstances.

A qualified retirement account can only be owned by an individual.  There are many rules and restrictions related to changing the ownership of a retirement account.  If you transfer a retirement account to your trust, there will likely be penalties assessed and income tax due.  Do not transfer ownership of your retirement account without consulting your tax advisor and financial advisor.  Generally, transferring a retirement account to a trust is not advised.

A trust can be made the beneficiary of a retirement account but, again, caution should be used.  Trusts usually pay higher income tax rates than individuals.  Also, it is often easier for an individual to manage an inherited retirement account than it is for a trustee to manage a retirement account on behalf of a trust.  So, it is usually best to have retirement accounts inherited directly by the beneficiaries rather than be held in trust for beneficiaries.

There are times when naming your trust as the beneficiary of a retirement account is appropriate.  The potential for higher taxes and more cumbersome administration can be offset if the retirement accounts should be managed by the trustee due to concerns with the beneficiaries.  Some situations that might justify using a trust as a retirement account beneficiary include minors as beneficiaries, concerns with marriage of beneficiary, the beneficiary’s inability to manage assets and providing creditor protection.  Particularly when a retirement account may involve large amounts of money and concerns about the beneficiary, naming the trust as the beneficiary may be warranted.

In all situations, the retirement account should have at least one beneficiary named.  If no beneficiaries are named, the account will go through probate and the administration burden on the executor and trustee will be significant.  Be sure to double-check all retirement accounts to be sure a beneficiary is named.

The integration of retirement accounts in estate planning is an important component of most people’s attempt to transfer assets to the next generation.  Be sure to discuss your retirement accounts with your attorney, tax advisor and financial advisor.  Making changes to the beneficiary designations of retirement accounts is a relatively easy process but knowing whom to name as the beneficiary should include careful analysis and consultation with your advisor team.

Ohio Budget bill includes many non-budget changes for ag

By: Peggy Kirk Hall, Attorney and Director, Agricultural & Resource Law Program

While Ohio’s “budget bill” is important for funding our agencies and programs, it always contain many provisions that aren’t at all related to the state’s budget. The budget bill provides an opportunity for legislators to throw in interests of all sorts, which tends to add challenges to reaching consensus. Though many worried about having the current budget approved in time, Ohio lawmakers did pass the two-year budget bill, H.B. 33, just ahead of its deadline on June 30.

We’ve been digging through the bill’s 6,000+ pages of budget and non-budget provisions and the Governor’s 44-item veto. Some of the provisions are proposals we’ve seen in other legislation that made their way into the budget bill. Not included in the final package were Senate-approved changes to the Current Agricultural Use Valuation law that would have adjusted reappraisals in 2023, 2024, and 2025. Here’s a summary of items we found of relevance to Ohio agriculture, not including the agency funding allocations. We also summarize three vetoes by the Governor that pulled items from the budget bill.

Township zoning referenda – ORC 519.12 and 519.25

There is now a higher requirement for the number of signatures needed on a petition to subject a township zoning amendment to referendum by placing it on the ballot for a public vote. The bill increased the number of signatures from 8% to 15% of the total vote cast in the township for all candidates for governor in the most recent general election for governor.

Legume inoculators – ORC 907.27 and 907.32

The bill eliminated Ohio’s annual Legume Inoculator’s License requirement for businesses and individuals that apply inoculants to seed. All other requirements for legume inoculants remain unchanged.

Agricultural commodity handlers–Grain Indemnity Fund – ORC 926.18

Ohio’s agricultural commodity handlers law provides reimbursement to a grain depositor if there is a bankruptcy or failure of the grain elevator. The bill revises several parts of the law that provide a depositor with 100% coverage of a grain deposit when there’s a failure:

If a commodity handler’s license is suspended and the handler failed to pay for the commodities by the date suspension occurred, the new law increases the number of days by which the commodities had to be priced prior to the suspension– from 30 to 45 days.
If a commodity handler’s license is suspended and there is a deferred payment agreement between the depositor and the handler, the new law:
Requires that the deferred payment agreement must be signed by both parties.
Increases the number of days by which the commodities had to be priced prior to the suspension — from 90 to 365 days; and
Increases the number of days by which payment for the commodity must be made pursuant to the deferred payment agreement — from 90 days to 365 days following the date of delivery.
Requiring 100% coverage when commodities were delivered and marketed under a delayed price agreement up to two years prior to a handler’s license suspension. The delivery date marked on the receipt tickets determine the two-year period. The bill also states that the Grain Indemnity Fund has no liability if the delayed price agreement was entered into more than two years prior to the commodity handler’s license suspension.
Two circumstances for 100% of loss coverage from the Grain Indemnity Fund remain unchanged by the bill: when the commodities were stored under a bailment agreement and when payment was tendered but subsequently denied. For all other losses, the new law will reduce the fund payment to 75% of the loss. Current law covers 100% of the first $10,000 of the loss and 80% of the remaining dollar value of that loss. Continue reading →

Financial Risk Management & Contingency Planning

Source: Purdue University

Farming is never the same from year to year – sometimes prices are good, net farm income is high, and other times margins are tight. Planning ahead, or contingency planning for financial hardship is important for any farm operation. In this final episode in the Farm Risk Management podcast series, Purdue’s Michael Langemeier and Ed Farris join Brady Brewer to discuss financial risk management. How to evaluate farm financials, update financial statements, analyze performance, and when borrowing makes sense.

A Financial Risk Checklist pdf and the audio transcript can be found below.

Markers:
00:51  Evaluate Your Farm Financials
04:17  Update Financial Statements
09:32  Analyze Performance
14:07  When Borrowing Makes Sense

Farm On financial management course offers farmers, ranchers training to meet new program requirements

A new online farm management course offered by The Ohio State University College of Food, Agricultural, and Environmental Sciences (CFAES) will help Ohio’s beginning farmers qualify for the requirements of the Ohio Department of Agriculture’s Beginning Farmer Tax Credit program.

Called Farm On, the self-paced, on-demand farm financial management course was created by Ohio State University Extension professionals and is offered through OSU Extension’s new Farm Financial Management and Policy Institute (FFMPI), said Eric Richer, assistant professor and OSU Extension field specialist in farm management.

OSU Extension is the outreach arm of CFAES.

“The Farm On financial management course was created to address the needs of Ohio’s new and beginning farmers who want to better prepare themselves to operate a commercial farm in Ohio and do that with a high level of economic stability while remaining profitable and responsible at every step along the way,” said Richer, who is the lead instructor for the Farm On course. “We believe Farm On will be a great deliverable to Ohio’s agriculture industry because it is on-demand, self-paced, and taught by Ohio State’s expert farm management instructor.”

What’s unique about the Farm On course is that, not only does it comply with the regulations of the new Ohio House Bill 95 Beginning Farmer Tax Credit program, it also meets the borrower training requirements for the U.S. Department of Agriculture Farm Service Agency’s Beginning Farmer and Rancher Loan Program, Richer said.

The Farm On course includes multiple video lessons, 10 quizzes, 10 exercises, individual and group consultations, and a 10-module course that covers the following topics: Continue reading →

An Agricultural Employer’s 2021 Tax Obligations: A Series

By: Jeffrey K. Lewis, Attorney and Research Specialist, Agricultural & Resource Law

As we settle into 2022 and regroup after a busy holiday season, one of things an agricultural employer should be thinking about is taxes, more specifically, have they met their obligations when it comes to federal and state employment taxes.  In this two-part series, we discuss the federal and state taxes that an employer is required to withhold from employees’ wages and the tax obligations that an agricultural employer is solely responsible for.  This series covers the taxes and obligations an employer has because of the wages paid to employees.  This series does not cover the business income or personal income tax reporting obligations of agricultural employers.

The first part of this series focuses on federal taxes and an employer’s obligations when it comes to social security, Medicare, federal income, and federal unemployment taxes. We also discuss when to pay the taxes and how to pay them.  The information contained within this series is not meant to be legal and/or tax advice.  Agricultural employers should seek out the counsel and guidance of an attorney or other tax professional to help them ensure they are compliant with their obligations under federal tax law.

Social Security and Medicare Taxes.  Generally speaking, an employer must withhold social security and Medicare taxes from the wages it pays its employees.  However, there are special rules for agricultural employers.  The $150 Test or the $2,500 Test will help determine if an agricultural employees’ wages are subject to social security and Medicare taxes along with federal income tax withholding requirements.

All cash wages that an employer pays to an employee during the year for farmwork is subject to social security, Medicare, and federal income tax withholding requirements if either of the following tests are met:

  • The $150 Test.  An employer pays cash wages to an employee of $150 or more in a year for farmwork.
    • This includes all cash wages paid on a time, piecework, or other basis.
  • The $2,500 Test.  The total that an employer paid for farmwork (cash and non-cash wages) to all employees is $2,500 or more during the year.

Continue reading →