what is a farm? what are the different tax structures for farms?

In the United States, a farm is considered a business that earns a minimum of $1,000 rearing livestock or growing crops for food, fiber, and feed. According to the Joint Economic Committee of Congress, farm business can be set up in three ways.

The first option is a sole proprietorship where an individual or married couple runs the business and is responsible for all financial and managerial decisions and obligations. In a sole proprietorship, individual income taxes must be paid. Sole proprietorships are the “classic” model of farm entrepreneurship.

The second organizational form is the partnership which can be limited, general, or a hybrid. In general partnerships, a minimum of two parties contribute assets to the business and they share managerial decisions, as well as profits and losses. General partnerships are common on inter-generational farms. In limited partnerships, financial liability is limited to the amount contributed to the farm by each respective partner. One partner is typically responsible for the on-farm activities and each additional partner serves only as an investor. The non-managerial partner[s] is generally in the partnership for investment purposes. Farm partnerships are not required to pay income taxes, but an information return is filed, and each partner is required to pay taxes on their share of the farm income.

Corporations are the third type of farm organization. One or more individuals, partnerships, or corporations own a farm corporation and the farm corporation itself is a distinct legal entity. Corporations generally hire a farm manager to run the daily operations, but the board of directors makes the management decisions. Since corporations are distinct legal entities, they pay corporate tax rates exclusively on net income.

sources:

• Joint Economic Committee Congress of the United States. (1985). The Effects of Federal Income Tax Policy on U.S. Agriculture. U.S. Government Printing Office: Washington.
• United States Department of Agriculture. (2018). Glossary. Retrieved from https://www.ers.usda.gov/topics/farm-economy/farm-household-wellbeing/glossary.aspx

image credit:

Livingston Mutual Insurance Company