In my previous post, I discussed a situation that applies to many farmers where there was joint ownership of land and whether a partnership tax return is required to be filed. In that post, I indicated that in many cases, a partnership tax return is required and if one is not filed, then the penalty starting this year is much higher than it has been in the past.
With this post, we will review how to elect not to file a partnership tax return and the advantages to doing it. In many cases, the mere co-ownership of farm land that is rented to a farm will not be classified as a partnership, however, it is very easy for the landlords to get tripped up in the process. If the ownership is set up in an new LLC, then usually the IRS is going to assume the entity is a partnership.
The benefits of electing out of a partnership are as follows:
- The owners may make tax elections that are different from each other;
- The loss limitations at the partnership level will not apply;
- You will not be required to file a partnership income tax return. This can not only save you the cost of preparing a return, but in certain states such as California, the fee to file a partnership tax return (structured as an LLC) can be in excess of $5,000 annually.
If you have determined that you do not want to be a partnership, then the election must be made with the tax return in the year that you want to elect out of the partnership rules. The partners must all consent to this election. Even if you fail to make the proper election, it may nonetheless be deemed to have occurred if your facts and circumstances indicate that you intended to do this from the entity inception.
Another important rule is that this election is only available for passive farm rental operations. If you are a farm partnership performing farm services, you can not elect out of the partnership rules.
My next post, however, will discuss allowing husband and wives to elect out farm operating partnerships.