Ogallala FREE Workshop- FSA Disaster & Loan Programs (including limited liability entities) and The Nebraska Beginning Farmer Tax Credit Program

You are welcome to attend a free workshop on Farm Service Agency livestock disaster programs, direct and guaranteed loan programs, and the Nebraska Beginning Farmer Tax Credit Program. There is no charge for the workshop.

June 29, 2017 at the Petrified Wood Gallery (418 E 1st St, Ogallala) from 1pm-3pm

To register (and for questions) call the Rural Response Hotline at 1-800-464-0258.

The workshop will provide an overview of livestock disaster programs (LFP, LIP and ELAP) administered by the Farm Service Agency (FSA) and an overview of FSA loan programs (both direct and guaranteed operating and ownership loans, including those programs targeted at beginning farmers and ranchers, as well as the micro loan program and the recently expanded farm storage facility loan program). The workshop will also address some of the issues that arise under these programs when farm and ranches use limited liability entities as part of their business and/or succession planning. There will also be discussion of the benefits and requirements of the Nebraska Beginning Farmer Tax Credit program (NextGen), including requirements for use of this program by family members. The workshop should be useful for established farm and ranch owners, for their successors, and for beginners. (This program is also being offered for CLE credits to bar members.)

 Joe Hawbaker, Agricultural Law attorney, with Hawbaker Law Office, Omaha

Amy Swoboda, Food and Farm Attorney with The Beginning Farmer Project of Legal Aid of Nebraska

This workshop is made possible through the Nebraska Network for Beginning Farmers & Ranchers and the Beginning Farmer Project of Legal Aid of Nebraska, under an outreach grant from the Farm Service Agency, USDA. 

FSA Disaster and Loan Programs- Grand Island- FREE WORKSHOP

Date- Tuesday, June 6, 2017
Time- 10:00am- noon

Location– Hall County Extension Office, Grand Island

The workshop will cover Farm Service Agency livestock disaster programs, direct and guaranteed loan programs, and NextGen (Nebraska Beginning Farmer Tax Credit Program). It is intended to be useful for established farm and ranch owners, their successors, and for beginners.

To register or for questions, call the Rural Response Hotline at 1-800-464-0258.
Topics include:
  • FSA livestock disaster programs
    • Livestock Forage Program (LFP)
    • Livestock Indemnity Program (LIP)
    • Emergency Livestock Assistance Program (ELAP)
  • FSA loan programs
    • both direct and guaranteed operating and ownership loans including those programs targeted at beginning farmers and ranchers\
    • micro loan program
    • the recently expanded farm storage facility loan program
  • Will address some issues that arise under these programs when farm and ranches use limited liability entities as part of their business and/or succession planning
  • Benefits and requirements of NextGen (Nebraska Beginning Farmer Tax Credit Program), including requirements for use by family members.
Presenters
  • Joe Hawbaker, Agricultural Law Attorney, Hawbaker Law Office, Omaha
  • Amy Swoboda, Food & Farm Attorney, Beginning Farmer Project, Legal Aid of Nebraska
These workshops are made possible through the Nebraska Network for Beginning Farmers & Ranchers and the Beginning Farmer Project of Legal Aid of Nebraska under an outreach grant from the Farm Service Agency, USDA.

March Clinic Dates

Farmers and ranchers are invited to attend a FREE clinic.  The clinics are one-on-one, not group sessions, and are confidential.  The Farm Finance clinic gives you a chance to meet with an experienced Ag law attorney and Ag financial counselor.  These clinic staff specialize in legal and financial issues related to farming and ranching, including financial planning, estate and transition planning, farm loan programs, debtor/creditor law, water rights, and other relevant matters.  Here is an opportunity to obtain an experienced outside opinion on issues that may be affecting your farm or ranch.  Bring your questions!

These FREE farm and ranch clinics are being held in:

March Clinics:

Norfolk clinic – Friday, March 3rd

Norfolk clinic – Thursday, March 16th

Fairbury clinic – Monday, March 27th

To sign up for a clinic or for more information, call Michelle at the Nebraska Farm Hotline:  1-800-464-0258.

The Nebraska Department of Agriculture and Legal Aid of Nebraska sponsor the farm finance clinics.

Farm mediation                  Legal Aid of Nebraska

Buy-Sell Agreements and Your Estate Plan

For those in partnerships and closely-held corporations, the incapacitation, death, or retirement of an owner can cause much angst.  So to can the possibilities of bankruptcy, divorce, or an attempted sale to a person or entity unknown to the owners.  The role of Buy Sell Agreements to address such situations is critical to ensure the business continues without disruption by the business falling into the hands of an unknown third party.

A buy-sell agreement is a legally binding contract, usually found within the operating agreement of a business entity.  A buy-sell agreement represent a restriction on ownership; restrictions which are agreed upon or imposed as a condition of ownership.  Three basic types of buy-sell agreements exist: (1) a Redemption Agreement, in which the company itself purchases the departing owner’s ownership interest; (2) a Cross-Purchase Agreement, in which the other owners purchase the departing owner’s ownership interest; and (3) a hybrid of the first two approaches, in which the company and the owners each may buy the department owner’s ownership interest, but with one having the first right to buy and the other the second right to buy.

How does the buy-sell agreement work in practice?  It typically works as a right of first refusal.  For example, if the departing owner receives a bona fide offer to purchase her interest in the company, the departing owner typically must first establish through a written document that the offer is valid and binding.  This may require both a written offer and down payment.  The buy-sell agreement would then provide that the company has the first right to buy the ownership interest for the same terms, or for other terms as directed in the buy-sell agreement.  If the company does not exercise its right of first refusal, the buy-sell agreement may then provide that the other owners have a right of second refusal to buy the ownership interests on the same terms as offered to the departing owner, or for other terms as directed in the buy-sell agreement.  Detailed examples of the above are in the linked article — check it out if you are interested in more information.

Another critical concern with buy-sell agreement is the purchase price of the shares.  There are three basic approaches to determining price: (1) fixed price method, or an agreement among the owners are to the value of an ownership interest in the company; (2) a formula method, wherein the buy-sell agreement sets forth a formulaic method, such as net book value or capitalization of earnings, for determining the purchase price; or (3) appraisal.  Also worth considering when determining how to calculate price is also how the company can fund the re-purchase of shares.

Buy-sell agreements can also address possible tax consequences and allocation of taxes.  Again, detailed examples are in the linked article — it is worth reviewing if a buy-sell agreement is of interest to you.

A buy-sell agreement is not the only estate and succession planning tool but it is one worth considering as part of your estate and succession plan.  A good buy-sell agreement not only protects the family operation but also the family relationships that are necessary for the family operation to continue.

 

USDA Expanding Opportunities for Beginning Farmers

The USDA announced yesterday new and exciting changes (read: opportunities) for beginning farmers, effective November 7.  Below are a quick list of the changes, which will be discussed in further depth in later blog posts:

  • The borrowing limit for microloans increases from $35,000 to $50,000;
  • Simplified procedures for lending;
  • Updating “farming experience” to include other experiences;
  • Expanding eligible business entities to reflect changes in how family farms and ranches or owned and operated.

More information from the USDA may be found here.

Pass-through taxation

You may have heard about the advantages of “pass-through taxation” when discussing certain types of business entities with your neighbors, other producers, your lawyer, or accountant.  But what exactly does pass-through taxation mean?

To explain pass-through taxation, we have to begin at the different types of business entities.  The simplest business entity is the sole proprietorship.  This is when a person does not have a distinct business but rather, just combines business income with personal income.  The taxes due for the business income are included on the person’s personal income tax information.  This is pass-through taxation — the tax passes through to the person’s own income tax and the business itself does not pay taxes.

A slightly different idea, but the flip-side to pass-through taxation, is the “double taxation” problem.  This is when a corporation, known as a C-Corp, first pays income taxes and then shareholders also pay taxes on any gain or dividend the shareholder receives.

Pass-through taxation avoids the double taxation problem.  The income from the pass-through business entity “passes through” to the individual(s) who have shares/ownership/income interests in the business entity and the individual then reports the income on their own federal income tax return.

It is always worth consulting your CPA for the finer details and possible outcomes when making a choice of entity decision for your operation.  However, it is worth knowing some of the terms of art with regards to business entities and pass-through taxation is one of the cornerstones.  There is nothing wrong with exploring all possible options for the type of entity for your operation and exploring any possible tax advantages or consequences; you never know unless you ask about pass-through taxation!

Partnership liability

It may be a familiar scenario: you and a family member decide to work together on the farm.  You both own some land, some equipment, and find it is easier to just work together indefinitely.  You soon begin to combine some accounts — it is easier and less expensive to buy all the seed and fertilizer you both need rather than make two separate orders.  And you discover that your family member is better at marketing the grain while you prefer the day-to-day work with the cattle herd.  Eventually, without even realizing it, the business assets are tied together with each person having decision-making authority.

What has happened here?  In short, you have created a partnership.  A partnership is a when two or more individuals come together and cooperate to advance their mutual interests.  A partnership does not have to directly or explicitly be formed; it can happen informally like in the above example.  And when informal partnerships occur, it means there is no agreed-upon mechanism by the parties to the extent of each person’s authority, the type(s) of activity the partnership can engage, and should each person wish to dissolve the partnership, how the partnership will be dissolved.

What makes many lawyers cringe about partnerships like the above is the lack of a formal agreement and the potential liability for all individuals in the partnership.  Let’s talk about each issue.

Partnerships can have, and many do, formal agreements on how the partnership is to organized, managed, and operated.  But that does not mean every partnership has a formal agreement and in fact, there is no requirement for such an agreement.  If there is no agreement, the State will step in with “default provisions” which govern any problems the parties may have.  You may not like these default provisions; it is worth a trip to your lawyer to understand the consequences of an informal partnership agreement.

The other concern is liability; specifically, individual, personal liability for actions undertaken for the purpose of advancing the interests of the partnership by other members of the partnership.  For example, if the partnership can no longer pay its debts, the creditor can come after your personal assets to satisfy the debt.  This is true even if it your partner who made the deal the incurred the debt.  In short, you can become responsible for another person’s bad behavior by virtue of a partnership.

Tread carefully if you are considering a formal partnership or if you may have inadvertently created one.  The advice of a lawyer is a good idea in these situations to learn the risks and rewards of a partnership.  If you would like more information for your particular situation, you are free to contact us.

Upcoming Events!

Curious about LLC’s and leases?  Wondering how each can be used for your operation and for estate planning purposes?  Well, come to our workshop!

The workshop will be held in Syracuse, (December 10th, 2013) in the basement of the First National Bank.  The workshop is 9:30 am to 12:00 pm.  There is no charge for the workshop.  To register (and for questions) call the Rural Response Hotline at 1-800-464-0258.

The LLC (limited liability company) – What is it?  How is it formed?  How it is used?  This discussion will include information on LLC operating agreements; on using the LLC to keep the family farm or ranch going between generations; on using the LLC to protect assets from creditors and family circumstances; on using the LLC to separate ownership and control of assets; and on the use of the LLC in estate and gift tax planning.

In addition to the presentation and discussion on LLCs, there will be a shorter presentation on Leases:  what goes into them and how they are used, both in ongoing operations and as part of transition planning.

Joe Hawbaker, Agricultural Law attorney, with Hawbaker Law Office; and

Angie Miller, Farm Attorney with Beginning Farmer and Rancher Development Program Legal Aid of Nebraska will present the program.

This workshop is made possible by the Nebraska Network for Beginning Farmers & Ranchers, the Farm and Ranch Project of Legal Aid of Nebraska, the Risk Management Agency of the USDA, National Institute of Food and Agriculture, the Nebraska Department of Agriculture’s Farm Mediation, Otoe County Extension, and the First National Bank, Syracuse branch.

LLC Taxation Requires A Great Relationship With Your Accountant

We have discussed what an LLC (limited liability company) is and how to form an LLC, but how is it taxed at the federal level?

The simple question has a somewhat complicated answer.  The LLC is a relatively new form of business entity that combines features of both partnerships and corporate structure.  In 1997, the IRS clarified how an LLC would be taxed.  This is known as “check-the-box” taxation, as the LLC checks a box on a form.

A single-member LLC may elect to be taxed as either a C corporation or a sole proprietorship.  A multiple-member LLC may elect to be taxed as either a partnership or a C corporation.  So, in order to determine how an LLC is taxed, we need to discuss sole proprietorships, partnerships, and C corporations.

Sole Proprietorship:

A sole proprietorship is a business owned by a single, sole individual and is treated as the individual owner for tax purposes.  There is no tax return specific to the business entity.  The only tax return is the individual’s tax return with the income of the sole proprietorship reported on Schedule C.  The business income is then taxed at the individual’s tax rate.  Note that business income includes distributed net profits and retained earnings.  Finally, keep in mind that a sole proprietorship is responsible for paying self-employment tax.

Partnership:

A partnership is, in its most simplest form, two or more people work together to advance their business interest(s).  The partners share profits, losses, deductions, credits etc.  A partnership is not taxed; rather, income, losses, deductions, credits etc. “pass through” to the partners.  The partnership reports each partner’s share of income, losses, deductions, credits etc. to the IRS and each partner in accordance with the partnership agreement.  The partners then report their share on their own tax return, regardless if there was an actual distribution of income to the partner.

Note that along with the potential distributions of profits and losses, partners may also be provided guaranteed payments for their services or capital contribution to the partnership.  These guaranteed payments are ordinary income for the partner and deducted by the partnership as an ordinary business expense.  However, if the guaranteed payment is for personal services, the partner is liable for self-employment tax.

C Corporations:

A C corporation is what a person typically thinks of when the word ‘corporation’ is used.  A C corporation is so called because it is governed by Subchapter C of the Internal Revenue Code.

Unlike a sole proprietorship and partnership, a C corporation is a taxable entity.  In other words, the C corporation files its own tax returns separate from its shareholders.  Taxable income is calculated by the C corporation and the corporation pays tax.  There are various tax strategies in C corporation’s that this blog post will not address.  What a farmer or rancher should be aware of is that the C corporation is taxed as an entity, unlike the other business entities discussed in this post.

Conclusion:

All in all, this post is a very small look at the considerations in selecting a business entity for your farm or ranch operation.  If you want a more detailed discussion of various business entities, feel free to contact us.  And don’t forget, also contact your financial professional — they know taxes, after all!

I know what an LLC is … how do I form one?

We broadly touched upon what a limited liability company (“LLC”) is in the previous post but how does one go about forming an LLC?

Because an LLC is authorized under Nebraska’s statutes, the statutes must be followed to form an LLC.  What are the steps involved?

  1. Choose a name for the LLC.  Note that the name must include ‘Limited Liability Company’, ‘LLC’, or ‘L.L.C.’ so the public is aware that it is an LLC.
  2. File a Certificate of Organization with the Nebraska Secretary of State.  The Certificate of Organization must include the LLC’s name and address, as well as the name and address of the registered agent of the LLC.  The registered agent is the person or entity authorized to receive legal papers for the LLC.  You also want to indicate the nature of the business on the Certificate of Organization.  The filing fee is $100.
  3. You are required to publish notice of organization for three successive weeks in a legal newspaper of general circulation near the designated office.  The notice must include the name of the LLC, street and mailing address of the LLC’s office and registered agent, and if organized to render a professional service, the profession service its managers, members, professional employees, and agents are licensed or otherwise legally authorized to render in Nebraska.
  4. An LLC is also required to file biennial reports — reports filed once every two years with the Nebraska Secretary of State.  These are filed in odd-numbered years.  There is a filing fee and if a report is not filed, the LLC will be dissolved by the State of Nebraska.

Keep in mind that while an operating agreement is not required, it is highly recommended.

If you are thinking of an LLC as you begin your farm operation or as a mechanism to assist in business and estate planning, Legal Aid of Nebraska is here to help.  Just feel free to contact us!