Agribusiness Tax Planning Presentation

Agribusiness Tax
Planning
Patrick Mulherin, CPA
Manager
Smith Elliott Kearns & Company, LLC
www.sek.com
pmulherin@sek.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
 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.

 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

 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

 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
 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

 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

 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

Agribusiness Tax Planning Presentation

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Agribusiness Tax Planning Presentation