Tax advantages of LLCs in farm operations.

• Jurisdiction: United States
• Author: Shrader, Dwight
• Date: 01 April 1999

The use of limited liability companies (LLCs) to own real estate used by farm operations provides self-employed farmers with significant opportunities to save taxes. Specifically, the use of passthrough entities in tax planning for self-employed individuals provides opportunities for (but not limited to) lowering self-employment (SE) tax; limiting personal liability; estate planning; and preserving Social Security benefits.

Example: A farmer, F, is currently filing Schedule F and reporting a $50,000 net farm profit. The farm consists of land and fully depreciated outbuildings, and has incurred a reasonable debt load that could be attributable to operating capital. F forms an LLC with (at least) two members and transfers the real estate to it, which begins to charge F rent for use of the real estate. Further, the lease is a triple net lease; the farm operation will continue to bear the real estate tax, insurance and cost of minor repairs. The fair market value (FMV) of the real estate approximates $500,000, with a reasonable annual rent of $40,000.

F has effectively transferred...