Tax Structuring Farm Operations
There are many different ways to structure your operations, and sometimes more entities and complexity are not worthwhile. This is a relatively simple 3 entity structure that will pay dividends for yourself and future generations.
- Land LLC – Have a partnership LLC own the land. This keeps the operating entity honest by always paying rent for the land. It also offers opportunities to have different owners in the land and operations. For maximum benefit, the operating entity should pay rent in crop or cattle shares so that the land LLC creates gross farm income for the owners.
- Cattle LLC / Equipment LLC – Have another partnership own the cattle or equipment. When items are sold for more than the purchase price it creates long-term capital gains. Having these in a partnership allows the owners to take advantage of these preferable individual tax rates. For maximum benefit, the operating entity should pay rent in crop or cattle shares so that the LLC generates gross farm income for the owners.
- Operating Corp – Have a C Corporation perform the operations of the farm or ranch. C Corporations can use Section 119 to provide onsite employee housing. This housing benefit can allow the corporation to pay lower cash wages due to the value of the housing benefit. This entity should have written lease agreements with LLC 1 and 2.
This is the proposed structure I will use in my own operations as I think it offers the best blend of benefits and opportunities for the owners at every level. For more mature operations LLC 1 and 2 may include off-farm heirs, but the Operating corporation should never have an owner that is not involved in the operations of the farm.