Tax tips for Farmers
Let’s talk about the ever-popular S corporation entity and some planning to help lower your taxes. These are by far the most popular choice for a new business with one owner or a few owners. They are popular for many reasons, due to the simplicity to form, cost to maintain in good standing, liability protection, and the best reason of all, tax savings.
Owner/ officers should take a reasonable salary (via w-2) to avoid a love letter from the IRS and at the same time expense out some of the work they do and reap some of the benefits of all that hard work. Don’t forget to employ your children and save some self- employment tax if they are under 18. You will need to setup a management agency to employ them through the corporation, as corporations can’t employ kids. I hope you can get yours to work better than two of mine. Make sure you spell out the duties of the job and don’t over compensate ($6300) is a great number by the way.
A shareholder may have deductible expenses related to their ownership of an S corporation. Ideally, the S corporation should reimburse the shareholder for out of pocket expenses that are necessary and reasonable. A new snowmobile or AR-15 is very cool, but not going to pass the test. This could be for expenses when starting the business, miles, lodging, meals, home office, and other items. Anyone who itemizes can take these on schedule A, but this is the wimpy way and they are not one for one. The key is to establish an accountable plan and show receipts for reimbursement. Sole owner S corps are very easy to setup in this fashion. We you have multiple owners it can get complicated as feelings can get hurt if owner A is reimbursed more that owner B. The clear majority of S Corps I handle are 100% owned by one person. The deduction for these reimbursements comes off the top not later when you prepare your personal taxes.
Things to remember are that you can’t reimburse for depreciation, you can reimburse rent, but it must be fair. If you reimburse rent at the s corporation level, then you have rent income on the personal return. S corporations don’t pay federal tax but do pay state replacement tax of $1.5. So, that is where you save. I don’t know about you but the banks aren’t paying anything close to that for holding and investing your money so invest in yourself and reap the benefits. Setup an accountable plan for reimbursing yourself out of your S corporation. Now go out and get that Christmas tree for the office and say ho ho ho when you submit your receipt for reimbursement. Merry Christmas
Steve Weber, CPA