Business Planning To Boost Yields & Hedge Against Losses
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Many farmers have already planned their next crop by the time their fall harvest ends. With wildly variable grain and livestock market prices and input costs, pennies quickly add up to dollars – whether as expenses or revenue. Planning to reduce expenses and avoid losses can be as fundamental as conquering pests and weeds, or as sophisticated as implementing GPS-coordinated precision farming technology. Legal planning is one of the cost saving and loss prevention variables in a progressive farm operation or other business.
Most farmers operate more tillable acres than they own. When a grain elevator issues grain checks to landowners and tenant farmers, the elevator treats both kinds of payments as costs of goods. However, the landowner and tenant do not experience the crop payment in the same way. The landowner pays income tax on the crop as rental income, but, in addition to income tax, the tenant farmer also pays Social Security contributions and Medicare insurance premiums. Unfortunately, many farms even pay those extra costs on land that they own – unnecessarily.
Farmers with savvy planning advice can organize their farm operations into corporations that separate the landownership and farm operation parts of farming. The IRS still requires Social Security contributions and Medicare insurance premium payments, but only on the operating revenue. If the farm operation and land ownership are not the same, it is possible to filter the landowner’s portion of farm revenue from the farm operator’s portion and save some farm revenue from extra taxation. If the total rate of combined Social Security and Medicare payments is 15.3% of gross revenue, and if the landowner’s crop share is 1/3, a farmer with extensive farmland holdings can save significant money with a little corporate planning. This same concept applies to most other businesses, but it applies most particularly to farmers.
Planning with a corporation can help farmers minimize losses in another way. Moving farm implements during planting and harvest seasons is dangerous. Entrusting those movements to seasonal workers can increase the risks if the workers are poorly trained and inexperienced. Liability insurance is always the first line of defense against financial costs and damage caused by accidents and equipment failures, but unexpectedly high claim values or hidden insurance coverage gaps can expose farm owners to asset seizure to pay uninsured liability claims. Corporate planning can help reduce personal asset exposure to farm operation liability.
A corporation bears responsibility for its losses, but its shareholders usually only risk their investments in the corporation. Therefore, if a corporation suffers a loss that liability insurance cannot cover completely, the corporation may dissolve, but its shareholders may be able to keep their homes and other assets. Exceptions to the general rule exist, but corporations with sound legal planning and careful management usually avoid those frightening exceptions.
The beginning of the year is a great time to reorganize any business because bookkeeping systems begin each year as a clean slate. Careful coordination among business owners, tax advisers, and attorneys can help business owners maximize tax savings and minimize potentially catastrophic losses.
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Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers. Jeff is a Fellow of the American College of Trust and Estate Counsel and the 2014-15 Indiana State Bar Association President . © Copyright 2014 Hawkins Law PC.
