I specialize in selling equestsrian properties, land and ranch property in Palm City, Florida. Owning a farm has many advantages and some disadvantages. I should know because I have an equestrian farm in Florida.
Martin County has applications for agricultural exemptions and there are different tax schedules, such as, Schedule F, that is used in filing Federal taxes. Buying any kind of property is a big consideration.
Horse farms receive unique treatment under the federal tax code. It is important to be aware of these special provisions and of other more generally applicable provisions that can cut your taxes. Consider these suggestions:
1. Choose your legal form of operation carefully. The four basic forms of operating a horse farm business are sole proprietorship, partnership, limited liability company, and corporation (either as a regular C or S corporation).
Sole proprietorship
Major advantages: Low cost of operation and start up, flexibility, taxation at individual level.
Major disadvantages: Unlimited liability (large problem if business experiences financial difficulty) and inability to deduct certain benefits available to corporations.
Partnership
Major advantage: Taxed at partners' level.
Major disadvantages: Unlimited liability for general partners, frequent changes in partners can be difficult.
C Corporation
Major advantages: Limited liability, able to take certain deductions not available to Partnerships or Sole Proprietors.
Major disadvantages: Greater cost, government regulations, double taxation, less control by owners.
S Corporation
Major advantages: Limited liability without double taxation, distributions (other than salary) may not be subject to self employment taxes.
Major disadvantages: More limits than a C Corporation on fringe benefits, only one class of stock, maximum of 100 shareholders, limits on stock ownership rights.
Limited liability company
Major advantages: Limited liability with partnership tax treatment, fewer ownership restrictions than S Corporations.
Major disadvantage: Inconsistent state treatment.
2. Choose an accounting tax method that minimizes taxes. Generally, you can choose (a) cash basis accounting or (b) accrual accounting, typically determined by the size of the farm. Generally, the cash basis is the more preferable method for horse owners, breeders, and trainers. The major advantages of cash method over the accrual method of accounting are simplicity, flexibility, and timing of deductions. Because the use of inventories is not required, bookkeeping and accounting requirements under the cash method are minimal compared to the accrual method. The valuation of inventories and other cost allocations required under the accrual method can be very complicated, costly, and time consuming.
3. Lease equipment from family members. The operating entity gets a deduction for the rent paid, while the property owner gets rental income (and possibly offsetting depreciation deductions).
4. Defer tax by using the installment sales method. Though the installment method of reporting income has been eliminated or restricted for many other businesses, it is still available for horse farms. It is an option that should be considered when you wish to defer the recognition of income until a later year.
5. Employee or contractor. Don't subject yourself to tax penalties by treating an employee as an independent contractor.
6. Separate repairs from improvements. Ordinary repairs and maintenance on farm equipment and buildings are deductible as current expenses. Improvements that materially add to the value of the property or significantly prolong its useful life are "capital" improvements and must be depreciated over a period of years.
7. You can elect to expense a certain amount of equipment costs in the year of purchase. Businesses can elect to expense up to $108,000 (in 2006) for certain property in the year it is placed into service. By doing so, the taxpayer receives the tax benefits in the current year, which is usually more preferable, rather than receiving them throughout the life of the property.
8. Hire your children. Reasonable compensation paid to the children is deductible by the farmer and taxable to the children in their own tax brackets (presumably lower).
9. Get a tax break if you have an operating loss. Farm net operating losses may be carried back several years or forward several years to allow for a refund of taxes already paid or an offset against income in profitable years.
10. Investigate all the tax credits to which you may be entitled. Remember that a tax credit offsets a tax liability dollar for dollar, whereas a deduction reduces your tax liability only by the percentage amount of your tax bracket.
11. Check fringe benefits. Horse farm operations conducted in corporate form have available to them various fringe benefits, such as group-term life insurance and group medical plans.
12. Don't sell your farm; exchange it. If you plan to sell your farm and acquire another or purchase other business or investment property, consider a tax-free exchange in order to defer the tax on the sale. Selling large properties such as buildings, land, etc. can produce very large tax burdens if not structured carefully. By structuring a like-kind exchange, a farm can be sold and another similar business property purchased while deferring all applicable income taxes.
When you sell your horse farm, you will probably be selling your personal residence as part of the package. Therefore it is tax advantageous to allocate your selling price between your home and farm. Married taxpayers who meet certain eligibility requirements may exclude from taxation up to $500,000 of home-sale profits. (The exclusion amount for singles is $250,000.)
13. Time equipment purchases carefully. If over 40 percent of equipment purchases take place in the last three months of the year, a business owner is required to use the Mid-Quarter Convention on ALL property placed in service that year. Because this typically leads to a large decrease in the current year depreciation deduction, it would be beneficial to avoid making large purchases within the last three months of the tax year.
14. Cut taxes with a retirement plan. A Keogh plan or IRA is appropriate if you operate as a sole proprietorship or partnership; a pension plan would be most appropriate if you are a corporation.
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