Dotting I's & crossing T's
This is the time of year when farmers are dealing with taxes and other financial paperwork. It’s also the perfect time to address those important “perpetual” tax documents that get outdated. This is important defensive medicine. The IRS will create havoc when your paperwork does not match current transactions or economic realities.
Most producers will have some land rental arrangements with related parties. A farm proprietor may be leasing land owned by his wife. The family farm corporation may be leasing land owned by its controlling shareholder. These leases need to be in writing and reflective of the rents currently being paid. From a tax standpoint, it’s important to add language indicating the landlord is providing no labor in exchange for the rent (i.e., the rent is paid for the use of the land only). This helps prevent IRS mischief on whether the rents might include some disguised compensation. Further, make sure the rents do not exceed going rates in your area for similar ground. Excessive rents will be construed by the IRS as implicitly including labor, allowing them to impose self-employed social security tax on the rents.
Most family employment agreements are written to clarify the mix of cash compensation and other fringe benefits. But duties and pay rates evolve over time, and it’s common to face IRS trouble with an outdated employment contract. Does the agreement define the duties being performed? Is the hourly rate or salary accurate and reflective of reasonable pay for those services? And are the fringe benefits, such as health insurance and use of a vehicle, accurately described?
Also, recognize that the total pay package, consisting of both cash wages and fringe benefits, should represent a reasonable value for the services being rendered. For example, if a spouse is receiving a $15,000 salary and $10,000 of health insurance, does a $25,000 compensation package reasonably align with the part-time services being rendered?
Corporate fringe benefits
When a C corporation is involved, the entity is often providing on-premises meals and/or lodging fringe benefits. This generally requires several supporting items of paperwork. There should be an employment agreement that ties key individuals to the business site and recites this fringe as part of their compensation package. Further, if lodging is involved, the residence must either be owned by the entity or specifically leased to the entity, so that the employer has the housing available to furnish to its resident employees. Finally, is the farming business still conducting sufficient activity to require the 24-hour presence of key individuals? And are those business needs documented either within the employment agreement or other corporate resolutions that establish the fringe benefit?
Keeping these documents in good standing will serve you well if the IRS pays you a visit! — Andy Biebl, DTN