The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
How to Transfer Equipment to Multiple Parties
Oct 28, 2010
One of our readers had the following question:
"I am slowing down farming. understand can gift 13000 a year in machinery value each to my son, his wife and his son. What records and paper work do I need for this? Do I need equipment appraised? Does this allow me to take this equipment off my equipment schedule and not pay any taxes on it? Also my son wants to buy, rent, or lease some of my other depreciated equipment. What is the best way to handle this and paperwork to back it up beings he is my son? Also my son wants to buy,rent, or lease some other depreciated equipment. What is the best way to handle this? . Anything extra because of his relation as far prices?"
A gift of one piece of equipment to one person is fairly easy to do. You simply transfer the equipment to the person, change the title (if there is title) and the equipment is now in the hands of the new person. Normally, you do not need to get an appraisal, however, if the equipment is fairly new and the is a combine, tractor, drill, etc. it would make sense to get an equipment appraisal. If the value exceeds $13,000, you are required to file a gift tax return, however, you can gift up to $1 million during your lifetime (above the annual exclusion of $13,000) tax-free.
Now, when you want to start gifting multiple pieces of equipment to multiple parties, I would suggest that you create a new LLC or S corporation to own this equipment. The transfer of the equipment to the LLC is normally tax-free and the same with a corporation (unless your liabilities on the equipment exceed your basis, then you will have some taxable gain).
After the transfer is down (and if you are married, I would normally have half in your spouse's name also), you can then transfer LLC units or stock in the corporation to your children and grandchildren. Another benefit of this structure, is that the gift is usually discounted by about 35% or so due to a transfer of a minority interest in a LLC versus the direct transfer of equipment.
Once this transfer is done, the LLC will then rent the equipment to your son to use in his farming operation. If you structure the LLC properly, you should be able to minimize the self-employment tax by having your son be the active manager of the LLC (with say 1% manager ownership interest) and having other other 99% being owned by you, your spouse, son, grandchildren, etc. These interests are not usually subject to self-employments taxes, if structured properly (this planning is based upon a proposed IRS regulation that was never finalized, so some tax advisors may not be totally comfortable with this type of structure).
I will probably do another couple posts related to this question in the next week or so to update some of the conclusions with more details, but this is an over view of how to handle these types of transactions.