Switching to S Corp May Be an Option
Neiffer: “A lot of farmers created C corps many years ago and over time they have built up large amounts of grain inventory, they built up some prepaid expenses and diverted payment contracts. They want to consider electing S corporations because it would save them some taxes especially in the long run. But there are a lot of advisors out there who say, ‘You can’t do that because you are going to have report this additional built in gains tax.’ — that is a tax that corporations that switch from C corp to a S corp. However, the recent tax extender bill dropped that period from 10 years down to five years that you have to worry about. A lot of advisors and farmers don’t realize that if their net income from farming in that corporation each year is zero or shows a small loss, there is no built-in gains tax code and if you do that for the five year period in year six it doesn’t matter at that point, you don’t have to worry about it. So for a lot of those farmers out there who think they can’t switch from an C corp to S corp because of the built-in tax code — I’m going to say you don’t have to worry about it.”
He does caution however, if you plan to sell your farm land in those first five years or sell a lot of equipment then there would be built in gains tax.