Farmers typically operate their business as one of four types of entities: sole proprietorship, partnership, C corporation or S corporation. Limited liability companies are also common, but they can be taxed like any of the others, depending on the circumstance. Of the entities listed, the C corporation grants farmers the greatest number of tax-free fringe benefits. The following is a summary of the benefits available to C corporations (in rare cases, they are also available to other entity types).
Employer-Provided Meals. Employers are permitted to provide a tax-free fringe benefit to their employees in the form of meals at the business premises, where it can establish that the arrangement is necessary for the business reasons of the employer. The rules require the employer to provide meals, not simply groceries. The employer should have an agreement with
his employees stating that part of the employer’s required duties is to prepare meals for the benefit of the corporation. Many times, this is done by the wife of the farm shareholder.
By spelling out this requirement in the employment agreement and documenting the preparation of the meals, the corporation has a deductible expense. In order for the meals to be 100% deductible (instead of the normal 50% deduction), the corporation should provide meals to all
similarly classed employees on a nondiscriminatory basis. The meals can be provided on a 24/7 basis.
Employer-Provided Housing. Another substantial tax-free fringe benefit for C corporations is providing housing for employees, owners and non-owners. The housing must be on the premises of the employer (or adjacent to or across the road from ground farmed by the corporation). Buying a house in town and calling it employer-provided housing will not work. Employer-provided housing can include household utilities, supplies and insurance.The corporation can depreciate the house over 20 years. It qualifies for bonus depreciation if it is new construction. The drawback is the potential depreciation recapture upon the sale of the house and the loss of the current personal residence capital gains exclusion of up to $500,000.
A house costing $200,000 could easily create an annual depreciation deduction of at least $10,000 plus a deduction for estimated utilities of perhaps $5,000, saving a farm family $5,000 or more annually.
Commodity Wages. This is technically not a tax-free fringe benefit, since the wage is still taxable to the employee; however, wages paid in commodities are not subject to payroll taxes. For many farmers, the payroll or self-employment tax can be substantially higher than the federal income tax.
There are several rules that must be followed to properly provide a commodity wage to a farm employee. In almost all cases, these wages should be paid only to the farm owner, since a non-owner might not be able to properly meet the rules. In any case, the employee, and not the corporation, must determine when to sell the commodity, incur the cost of continuing to own the commodity and receive the sales proceeds.
Documentation. Lack of proper documentation has cost many farmers the ability to treat these fringe benefits as tax-free. All C corporation employers should have board minutes outlining any fringe benefits provided to their employees—and explaining how the benefits provide value to the corporation. The duties of the employee and benefits provided by the employer should be documented in an employment agreement.
All the documentation in the world will not help if the farmer does not follow the rules. The key is to know the rules and document how they are being followed in order to take advantage of being "on the fringe."
Paul Neiffer is a tax accountant with LarsonAllen LLP and author of the blog The Farm CPA. He grew up on a wheat farm in Washington and owns a corn and soybean farm in Missouri. Contact him at email@example.com
- January 2012