Seperation of Ranch and Personal Property(Taxes & Earnin

[Chuckie]

I am still a small time cattle operation. I am reading about seperating your ranch from your personal assets.
Would someone please tell me how, on taxes, this will make your check book come out ahead, on either personal or Ranch property:
Create a seperate Ranch from personal property. The ranch, "Cattle Co." now is seperate.
In this deal, Chuckie leases his land to his ranch called, "Cattle Co." and counts the leased money earned on his personal taxes as income. Then, Cattle Co, pays to lease the land from Chuckie, and counts the money's paid on his deductions on income tax.
How on taxes is this method used to come out a head on taxes? I have never leased land before nor have I leased land for money. One of these has to outweigh the other for it to be worthy of seperating the two.

 

[msscamp]

I would suggest you talk to Madbeancounter. I think it has to do with how you set up your ranch property - that is whether it's a corporation (which flows through to the owner), limited liability, s-corp, etc (which does not). I'm not clear on the specific details, but I would be willing to bet that Madbean is.

 

[bullred]

Chuckie,

If your ranch operation is set up as a sole proprietorship, as most are, it doesn't make any difference. Structuring as an LLC, Partnership, Incorporation, etc. is somewhat different. But if the only reason you would choose one of these business structures is to reduce taxes, then it's not really worth the effort, because it's not going to save you anything really. But for instance, if you had a sizeable personal wealth that you didn't want to put at risk from liabilites associated with starting up a ranching operation you might consider an incorporation or LLC structure. Or if your ranch really was a corporation (multiple stakeholders) you would want to structure as such. But at the end of the day for most of us there's no benifit in doing this.

However, in order to take advantage of the legitimate tax deductions that are available you should run it as a business and not a hobby. Seperate bank accounts, establishing a DBA name, accurately tracking expenses and income, making "sound" business decisions, etc. are all determinant factors the IRS uses in deciding if you are running a business or engaging in a hobby.

Now I'm not an accountant, but I did stay at a Holiday Inn Express last night! So I'll end with the disclaimer that when in doubt you should consult a CPA or other tax professional.

CJ

 

[Chuckie]

Bullred, There are only two of us employed at the "ranch!" Cracks me up to call it a ranch! Right now, I don't see any reason to seperate the two unless there are some tax deductions that I could benefit from. I do list the farming as a seperate form of income, and but have not formed an LLC. I am not trying to avoid paying my share of the taxes, but at the same time, I want to utilize the deductions that Uncle Sam provides. I read a lot where it says to seperate the two for tax purposes. I can understand seperating the two for purposes of losing the farm but not your home in case someone says they were abducted by aliens on your farm and want to take you to the cleaners. But am not sure why bother with listing the ranch leasing the property other than when I first listed my farm, they asked when or how I obtained the land. That might be the reason to list it as leased land other than purchased.
I do appreciate your help.
Chuckie

 

[cypressfarms]

Now I'm not an accountant, but I did stay at a Holiday Inn Express last night!
CJ

:lol: :lol: :lol:

Mine's set up as a sole prop. DBA. I'd rather it be a LLC.

But Chuckie, you don't have to be wealthy to be taken to the cleaners. You could just as easily be sued and OWE money, as being sued (if your wealthy) and paying it.

 

[Susie David]

Chuckie...we set up as a sole prop LLC. One way or the other you have to account for your $$$. Since all assets are ours and all deductions, depreciation and expenses etc are accounted for on schedule F anyway we went with the LLC for the liability protection.
Hired a tax guy this past year as we had a complicated return and actually made money...our guy specializes in farm/ranch work...will keep him on.
I'm looking forward to the madbeancounter's advise myself, he's provided some grerat suggestions.
DMc

 

[Chuckie]

Cypressfarms and Susie David, maybe madbeancounter will show up. Looks like it is time to send out a smoke signal!
Chuckie

 

[cypressfarms]

Believe it or not, H&R Block does our taxes, and we are very satisfied with them. Maybe it's because the H&R people do so many taxes for people who have farms, but they seem to know every tax cut that I'm eligible for.

Anyway, I'll stick with H&R until someone shows me better.

 

[MrBilly]

Since Warren Buffet's holding company (Bershire Hathaway) owns HandR Block, it must be good. I wonder if they do Warren's personal taxes? Nah, I doubt it.
:roll:


At the suggestion of our Accountant we formed an LLC several years ago. Actually, he recommended a GA online lawyer who did an excellent job for a couple hundred bucks. Now there are all types of online companies that will form LLCs for almost nothing. Doing so, made us transfer ownership of all farm land, equipment, cattle, and farm assets to the LLC. The wife and I are the equal share holders of the LLC. The land was transferred on the tax roles to the LLC. I think as others have mentioned the important thing is to limit one's liability - selling cattle for meat, cow runs out in front of a car and kills the driver, etc. We also file two separate tax returns, one personal and one for the LLC - this does add to one's expenses, but it allows you to take the losses on your personal income if you have any. Taking deductions can also be done without having an LLC; for me, it is just "cleaner" if the business income and expenses are separate from our personal income and expenses.

As mentioned by others to qualify for tax purposes the thingy needs to be run as a business. You need a business plan, annual meetings, everything needs to be done in a manner that is aimed at making a profit and record keeping needs to be extensive, just like in any real business.

Good farming!

We have learned how to actually make a small fortune in farming - start with a large one!

Chuckie, we are happy with our situation, but I think it is time for a good accountant to tell you specifically what is best for you.

Billy :cboy:

 

[Chuckie]

Thanks Mr. Billy! That makes sense!

 

[madbeancounter1]

Sorry Folks,

I am quite a bit slower at typing since the accident so I have kind of stayed away from the keyboard since I keep hitting more than the key I intend with all these bandages on: and
the good state of Oklahoma has seen fit to audit one of my clients for every known tax he files. Fortunately everything is up to snuff and they will end up owing us money on this one.

OK Chuckie. Most of what you have been told is accurate. The reason for seperating assets is two-fold. One, it clearly delineates what is business property and what is personal property. A business asset can be fully depreciated whereas you will not be doing this with a personal asset. However, if you are going to list an asset as a business asset you should plan on listing it on your business personal property tax return as well. As for leasing land to your cattle co and then picking up the income as rent on Schedule E and letting the ranch deduct the lease payments it isn't a complete wash as suggested. If the ranch deducts the lease payments it reduces the profit in the ranch and thereby reduces the net income on which self-employment tax can be assessed. Normally rent income is not an item on which SE tax is assessed so while you will pay income tax on the rent you will be saving the SE Tax you would have paid. Keep in mind that if you have improvements on the land the rent income can be offset with depreciation expense and possibly the Real Estate Tax and other expenses associated with the upkeep that you may choose to pay personally rather than through the ranch.

As for the debate about LLC v Corps.

1. LLC's do limit liability to the individual and
2. are easier to set up than Corp.
3. LLC's make it easier to transfer assets in and out of a business and to add and remove members.
4. LLC's can be set up as single member LLC's - You will still fill out a Schedule C just as if you were a Sole Proprietor. or,
5. The default form of LLC files a form 1065 (partnership return). Something to take note of here is that most partnerships do not have the partners themselves on the payroll. In Lieu of payroll the partners receive what are known as guaranteed payments. Gauranteed payments are considered SE Income and you will pay SE Tax on them. You can take payments that are not wages and are guaranteed but these reduced your capital accounts and should be avoided if possible. This is not to say that you cannot be put on the payroll if you should choose to do so. - just a note
6. Another way to make the LLC work is to file the disregarded entity form. In this way, you form an LLC and then tell the IRS that you want to be taxed as a Corporation or as an S-Corp. If you want to be taxed as an S-corp then you will need to file a form 2553 as well. In these two forms of reporting you will file either a form 1120 or an 1120S.
7. The way you get the income from forms 1065 & 1120S is by way of form K-1. Form 1120 of course is not the method of choice because tax rates are higher and there are a host of other complications that go along with it.
8. There is no problem with deduction of losses no matter what the form of business you choose to use (except the 1120) as long as you run the cattle company as business and not a hobby.

Hope this helps.

 

[madbeancounter1]

Something else. For any of you that want to set up LLC's. Check your States website. Here in Arkansas one can go online and set up an LLC in just a matter of minutes provided you have a credit card. There is a $45 charge for the service. If you choose to do this you will also need an operating agreement. I have a generic one that I may share if you send me a PM. You will also need to make visit to IRS.GOV and run a search on form ss-4. This is to get a federal ID #, costs nothing and you will have the number as soon as you hit the submit button as long as you have all the info filled in.

Any questions PM me and I will try to help.

 

[Chuckie]

madbeancounter, I sure hope your hand gets better. Just the experience sounds bad enough, much less having to wait till your hand heals.
I am going to have to go over this in more detail and look into the laws of Tennessee to see what we need to do exactly. It sounds like this is the direction we need to take.
I wasn't sure about the leasing of the land etc.... I had read where it does happen, but I am sure they are much larger than I will ever become. When you read these things, you always feel there is something you haven't considered before that needs your attention. Thanks for taking the time to type with your hand. I am sure that was not the easiest thing to do.
Good deal on the audit in Oklahoma. I bet he was glad to have you at his side.

 

[mitchwi]

I would just like to remind everyone when considering different taxing entities to look at YOUR individual "big picture". What "everyone" is doing, or your "neighbor", or whoever... isn't necessarily the best option you should take.

For example, someone setting up an entity for the real property holdings to relieve you of self-employment taxes (FICA and MEDICARE) is the price of another tax return, time to keep additonal checkbooks, etc., worth the % of SE Tax you'd pay? Or, perhaps it would be beneficial to you to be paying in some SE Tax in order to maximize your social security benefits.

All I am trying to say is make the right decision for you, don't worry about what other people are doing. And remember, when your talking dollar for dollar out of your pocket, sometimes paying in tax dollars isn't the worst thing, and could potentially cost your less than other alternatives.

 

[madbeancounter1]

mitchwi -

I agree with your evaluation ... I was looking at it from the standpoint that most of us have outside jobs. If all you have is the farm income then it may be that paying some SE tax is a good move. Then again you may have a goose that lays golden eggs and you have enough of an income to set up a good self-directed retirement plan.

 

[mitchwi]

Terry - I'm sure you sometimes see bad mistakes people make, because of the "they" factor.....too often I think people have made poor decisions and it has cost them..... Everyones situation is different and decisions need to be made on their particular circumstance(s). I probably sound like a broken record, I will get off the podium now!

Also, when explaining the LLC and guaranteed payment theory, subject to SE tax, I thought the Gov is still out on that.... ( I have not done any research lately) I have let people know that this is an agressive road to take.... Have you had any activity in AR on this?

Pease get well soon!

Michele

 

[madbeancounter1]

Yep... got one client (LLC filing 1065) that pays everyone else on the payroll and he takes gauranteed payments. Our position has always been that they are subject to SE tax. CCH must agree because the ProFx doesn't give any leeway on where to enter the guaranteed payments and the K-1 shows them on the SE line.

Most of the LLC's we set up now we immediately check the box and file the 2553. Gets us out of the arena providing legal services which we aren't supposed to be doing and saves the client some $$. Also it's the most flexible entity form to use for what most of our clients do.

We generally stay away from the he said/she said stuff when advising people what's best for them to do but if they ask general questions such as Chuckie did... ie why would someone do this and what are the advantages of one entity over another then we do just what I did. This is why some people choose to do this and if you decide you want to do this then these are some of the things that you need to be aware of. Other than that we have them come in for a free consultation and go over everything in detail and listen to what the clients objectives are before moving forward.

I don't mind giving out general information when someone asks but if someone wants specific information for their situation then we need more disclosure and I would hesitate to do so in a public formum like this. If they want to pm me or shoot me an email and ask for a phone consult I am glad to oblige.

But to echo you: what's good for them may not be good for me and there are always other considerations such as does your state law mirror federal law and did joe-blow down the road get his info direct from a reputable accountant or attorney or did he hear it during a game of telephone, or was your county not declared a drought area when mine was.

I'll always be glad to provide general tax help and even detailed help if needed. Just need to know which is needed.

Thanks for the get well wishes. I can use all of them I can get. My wife started calling the family and a couple of friends as soon as she got me into the ER. I am convinced that the ir prayers did some good because it sure looked a whole lot worse and it seems to be healing faster than the timetable the Doc gave. Just hurts like the dickens every time I bang it on something.

Dad lost most of his left hand in a farm accident 30 some years ago and he tells me that when he bangs his stump it can still send him through the roof.

 

[mhoback]

8. There is no problem with deduction of losses no matter what the form of business you choose to use (except the 1120) as long as you run the cattle company as business and not a hobby.

You had some great info on this topic, madbeancounter. But I take issue with #8. You can only deduct losses from an s-corp or partnership if you have basis. There is a limitation. Otherwise, great info.

 

[madbeancounter1]

mhobak

sorry... failed to mention that.

The basis issue is a great point and I was actually thinking about it when I wrote those answers. For those of you exploring the S-corp and Partnership forms of business it is something you need to be aware of. Basis can take more than one form. ie stock basis vs debt basis vs retained earnings or partners capital accounts. Your losses can only be deducted to the point that you have basis.

Was at CPE this afternoon and have heard this mentioned a couple of times now. The kinder, gentler IRS is a thing of the past. The service has selected 5000 S-Corp tax returns filed in 2003 and 2004 for audit. They are primarily looking for entities in which the shareholders took distributions without taking adequate W-2 wages. They claim that the average shareholder of these S-Corps took wages of $5000 and distributions of 300K +.

Something else is the circular 230 rules. Several other accountants that I have talked to have remarked that it reads as though that it applies only with regard to tax shelters. But the last to CPE's I have attended both say that it applies to any opinion rendered that could be construed as giving tax advice. In any case in the next week or so I will be adding a statement in the signature area that will put me in compliance with circular 230.