Corp vs Family Farm!

[SASKFARMER3]

Here is a observation I am throwing out their. Two farms, Farm A corporate vs B family farm. Time period 1962 to 2002. Both sold out Corporate moved to Alberta then back to Sask. Both received top dollar for farm, Corporate clean sale with real-estate, and auction. Farm B neighbors with sale of equipment private took 5 years still plays on two quarters.
Farm A today lives in apartment in city, no winter vacation, Lower cash reserves. Farm B lives in own home in Arizona and market took top of savings but still cash coming in.
So who really one Both graduated same year high school married nurses and farmed same size farm.
To me the Balance sheet after all said and done is way way way nicer on farm B than farm A who had professional help to end the farm.
Simply all farms are getting pushed to go corporation, its the newest game in town. But most farmers don't realize that their is no no no help if the ship hits the fan and three bad years hit . Corporate is done done done. Family keeps going. Any way open for discussion, But the books of B are way way better.

[SASKFARMER3]

Again to clear up the post its a comparison where family farm comes out ahead of a corporate. Yes their are other examples of corporation that beats family. But for argument sakes a proper planed family farm can do just as good as a corporation.

[SASKFARMER3]

S3 if your family farm is not making money, then the family corporation is no help.

On the other, what is your advice to me when I tell you that our farm is making $300,000-$500,000 net income cash basis and even more on the accrual basis?

If you claim the non incorporated farm is better I will disagree. For those that make true profit, the family farm corporation is a huge advantage.

The key is how it is set up and the process of getting a family farm to the corporation. There's where the huge advantage lies and the every professional's approach is different but not necessarily better.

In a nut shell, anyone who does a straight incorporation is missing a huge tax advantage and savings.

[Hopperbin]

Why would the corp. be worse off in the bad 3 years. Incorporated farms are still family farms. And I am like 99 the farm makes way too much money not to be incorporated. The taxes would kill the non incorporated farm. I have heard of farmers deferring grain tickets 2 years or buying inputs always all before year end or most heard of is buying equipment unnecessarily.

[Hopperbin]

Then the non inc. farmer dies and guess what happens to all his tax saving deferring.

[SASKFARMER3]

Boys whats wrong with paying for inputs two years in advance and deferring in bad years no problem no problem at all. Its a insurance. And in the example these two guys the one who wasn't incorporated paid his taxes etc. is way ahead by couple million dollars.

[Hopperbin]

I suppose deferring and buying ahead is planning for a bad year. Not deferring and buying in year of use is planning for a good year ahead. "Cool" I am optimist.

[lesm]

SF3-marginal tax rate in Sask. is 44%, while flat tax for corp is 18-19% for the first $500000.00. Huge advantage. Eventually you may have to pay the tax, but look at the extra money you will have to work with for all those years.

[lesm]

In your "made up" example I cannot see where there can be such a difference. Unless one has purchased the right lottery ticket, or misfiled tax returns, there must be more to the story.

If you have been a profitable farm, there is no way you can avoid the tax. The key is to manage the tax liability at the right rate. If you push it off, it catches you at the end and if it doesn't, it means that you have lost the growth along the way. Every goof farm business person understands this.

Paying inputs and deferring 2 years in advance also ties up the cash. Although buying inputs at the right time can be a cost effective management strategy, I don't know why someone else should always have $500,000 for my next years inputs and over a million in next years sales to help their business.

Corporate rates in Sask is 15.5% on the first $500,000. (even lower in Manitoba) I would suggest to anyone the alternative of the tax pmt of $77,500 and having the balance sitting in my account. On the flip side, if I actually "lose money" in reality (accrued income, not cash basis) I can carry back the loss to recover some of the tax paid in previous 3 years.

But maybe like Hopper says, plan for a future failure year where you can ride the wave...

Maybe I am stupid and live/farm in an area of consistency and/or am able to see my operation through it and remain profitable.

It is unfortunate that all cannot replicate this in all areas of the prairie provinces because of environmental factors. Its truly the environmental factors that make it a challenging business, nothing else. Everything else we have a choice...

Just like whining & complaining on this blog...

[lesm]

SF 3 and 99.

Don't always judge a farm by tax #'s only.

We farm 8000 acres, and 7300 are cash rented.

Judging by your #'s 99 I think you said out of 70 2/3 are owned. Our farm would on average have 175,000 to 200,000 more expenses than the farm with owned dirt. Also depends on how much expanding was done in past 5 years. If expanding by buying vs renting, the buying side will be getting hit alot harder by tax then the renting side.

[lesm]

Yes snappy, your assumptions may be correct. I would also hope you are basing your numbers on an accrual basis so that you can keep tabs on your deferred tax liability.

I view ownership of land similar to rent. If I have a quarter of land worth $100,000 and its paid for, my opportunity cost is the average borrowing rate, or $6000 per year, plus taxes. If I can rent land for a similar value, its really a wash. In tough years, owning land gives the misconception of reduced costs, but in the financial world, you still need to capture the opportunity cost.

There will be timing differences with every farm, however, if the profit is there and your cash numbers don't show it, it could be an issue of living on depreciation, low principle pmts on loans etc that will cross over and catch you later on. Finding a balance and along the way and dealing with the future tax on an ongoing basis using option inventory adjustments will smoothen out the issues later on.

And dear god, if your a farming as a non incorporated entity (which is okay), please make sure you are structured as a family farm partnership.