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Restructuring your Farm Business
You may have wondered from time to time if you should consider incorporating your farm! Corporations benefit from a tax rate of 15.5% on the first $400,000 of active business income each year. This rate is substantially better than rates up to 44% that similar income would result in personally. But, you must remember that when you remove funds from a corporation to use personally, you will likely be subject to personal tax rates at that time. In this situation a corporation basically gives you a deferral of tax; however, there are situations where a corporation gives you true tax savings such as:
- When it provides the ability to control the amount of income you remove from the corporation each year so that you are taxed at a lower rate than if you had received the original income personally.
- When you can pay down debt in a corporation using income taxed at the corporate rate as opposed to paying down debt personally using income taxed at a higher rate.
- When you take advantage of the Capital Gains Deduction when transferring a qualifying farm partnership into the corporation giving you a substantial shareholder loan that allows you to take funds out of the company tax free!
Creating a farming partnership with your spouse or other family member prior to incorporation can enable you to take advantage of significant future tax savings. This partnership could qualify for the capital gains deduction after two years at which time you can transfer your partnership interest to a corporation at its fair market value. Because this transfer is claimed at fair market value on your personal tax return, you may take back a shareholder loan from your corporation for the amount of the equity you have in your farm, entitling you to remove this equity tax free to yourself out of the corporation over time.
A corporation is a very good tool to use if the profit from your business is significantly higher than your personal spending or if you are anticipating exiting the farm in the near future, but planning ahead in order to take advantage of special provisions to utilize your Capital Gains Deduction can be very worthwhile! To find out more information please contact our office to schedule an appointment to discuss your situation!