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L •Federal Reserve Bank of Chicago March 18, 1960 • INCORPORATION of farm businesses is receiving more and more attention. As the size of farms has increased and land prices have risen, the capital investment per farm has similarly increased. This has presented the twin problems of(1) accumulation of adequate capital within the farm business and (2) the transfer of the business from one generation to the next without serious disruption. Under provisions of present laws, incorporation is one method of meeting these problems. Taxation of income was one of the main disadvantages of the corporate form of organization prior to 1958. Until that time, taxes were. paid on the profit of the corporation and then by the stockholder ,on dividends received from the corporation. Of.'course, some highincome farms found it advantageous to be taxed as a corporation. This is true because corporate tax rates at higher income levels are lower than individual tax rates. The first $25,000 of taxable corporate income is taxed at 30 per cent. An additional 22 per cent (52 per cent total) is charged on income over $25,000. The personal income tax rises to a marginal rate of 30 per cent for a married person with taxable income from $12,000 to $16,000, and the 53 per cent marginal rate is reached for income beginning at $36,000. Thus, paying a corporate tax on income and retaining this income within the business could reduce total taxes and permit more rapid accumulation of capital within the business for farmers with high income. • Also, this tax disadvantage would not , apply for firms with no net income. By planning the operation of a corporation so that all the receipts of the business could be paid as salaries and wages, many of the,advantages of incorporation could be obtained without incurring the tax disadvantages. -The, corporation tax handicap has been removed under a 1958 tax law revision. A qualifying corporation may now elect to be treated as a partnership for tax purposes. The shareholders are taxed directly as individuals on the income of the corporation. To qualify for this taxation procedure, a corporation must have only one class of stock, no more than ten shareholders and at least 80 per cent of its income from earnings. (This excludes interest, -dividends, royalties or sales ofstock.) Continuity of operation is an important advantage of the corporation. It may exist as long as the shareholders desire. Should one of the stockholders die or decide to sell out there would be no need to break up the business, as in a partnership. It would merely be a matter of transferring the stock to a new owner. This ability to transfer ownership of undivided interests provides an easy means for oncoming generations to buy into the business. • Estate planning can be eased in some instances if the business is incorporated. Under Federal tax law, Ctt Number 550 there is a specific exemption from gift taxes of a "lifetime" sum of $30,000 per donor and, in addition, an annual'exclusion of $3,000 in gifts to each donee. If a husband and wife make gifts to a third party those amounts may be claimed by each spouse. For a farm operator who is planning to pass ownership to his heirs, it is not easy ' to break the farm business into parcels of the proper size to take advantage of these tax exemptions. But with the device of a corporation, it is possible to divide ownership into small units. Fringe benefits may be obtained through a corporation, with advantages in terms of taxes or, benefits. Social security benefits are determined by net earnings of the individual which qualify under social security legislation. For this reason it may be advantageous for , the farm operator approaching retirement age of 65 to incorporate. As an employee- of the corporation he, can receive a constant salary for a. short period of years, . even though the corporation may show a loss. The corporation for tax purposes may also deduct as business expenses fringe benefits such as medical payment plans, employee death benefits and group life insurance. Under a sole proprietorship such benefits cannot be deducted from taxes. In view of the complexities involved in establishing a corporation, a qualified attorney should always be consulted. THE SPRING PIG CROP is now reported to be down somewhat more than was indicated in earlier reports. The number of sows farrowing is expected to be 13 per cent below last year in ten states. The largest decline is in the early period, December through February, down 19 per cent. The March-through-May period is reported to be down 10 per cent. However, the current rise in hog prices is apparently having an influence on farmers' breeding intentions. The number of sows to farrow the. first part of the fall pig crop, June through August, is down just 4 per cent. The largest declines in -prospective farrowings are reported in the western Corn Belt states of Minnesota, South Dakota, Nebraska and Kansas, while the smallest declines are in the eastern Corn Belt states of Ohio, Indiana and Illinois. The western states have typically shown larger variations in farrowings over the course of the hog cycle. Research Department FARM BUSINESS CONDITIONS, 1940-.1959 ANNUAL SUMMARY , ITEMS 1940 PRICES: . Prices received by farmers (1947-49=100) -TT Paid by farmers (1947-49=100)........ 50 Parity price ratio ... ......:........ (1910-14=100)....... 81 51 (1947-49=100) Wholesale, all commodities 60 Paid by consumers ................... .(1947-49=100). (dol per bu.) Wheat, No. 2 red winter, Chicago .95 .63 Corn, No.2 yellow, Chicago ................(dol. per bu.) (dol. per bu.) ......... Oats, No.2 white, Chicago .39 .95 (dol per bu.) ......... Soybeans, ao. 1 yellow, Chicago ....... (dol per cwt) 5.80 Hogs, barrows and gilts, Chicago......... 11.86 (dol per cwt.) Beef steers, choice grade, Chicago 1.82 (dol per cwt.) Milk, wholesale, U S .28 (dol per lb.) Butterfat, local market, U. S. .14 (dol per lb.) Chickens, local markets, U. S. .18 Eggs, local markets, U S (dol per doz) 61 (dol per head) Milk cows, U S Farm labor, U. S. ......................(dol per week without board) 9.38 25.20 (dol. earned per week)... Factory labor, U S PRODUCTION: Industrial 3 Farm marketings INCOME: Total personal Farm: Cash receipts from marketings Farm operators' net, total Farm operators' net, per farm Income of farm population from all sources 1945 76 76 109 69 . 77 1.73 1.21 .74 2.20 IA.75 17.30 3.19 .50 .27 .38 1.11 25.25 10-39 106 77 (bil of dol) (bil of dol.) (bil of dol.) (dollars) (bil of dol.) EMPLOYMENT: Farm .................-..............(millions) ....... (millions) Nonagricultural . 4 FINANCIAL (District member banks): Demand deposits: Agricultural banks (1955 monthly average .A-,100) ....... Nonagricultural banks (1955 monthly average =100) Time deposits: Agricultural banks (1955 monthly average =100)............... Nonagricultural banks (1955 monthly average =100)............. 92 117 85 13.9 124 2.041.26 .69 2.23 20.28 27.42 4.15 •59 .18 .38 209 42.5o 83.50 1259 1 89 119 80 120 125 1.97 1.23 .72 2.22 14.8427.83 4.16 .59 .15 .31 232 44.50 89.47 0 159 127 98 113 100 141 125 78.7 171.2 228.5 359.0 380.1 8.4 4.6 720 8.o 21.7 12.4 2,080 18.2 28.5 14.0 2,479 21.0 33.6 14.2 2,990 22.3 32.8 11.8 2,530 20.3 9.5 37.9 8.6 44.2 7.5 5.5 5.8 58.1 5.8 59.7 --- -- IWO Olik 109.2 108.9 103.0 107.7 -- --- -_ "- 124.2 123.1 130.0 125.7 1 Preliminary estimates. 2 Estimates based on monthly wage rates for years prior to 1948. 3 Revised series. December. 95 102 101 103 103 2.22 1.50 - .85, 2.74 18.39 29.68 3.95 .62 .25 .37 198 31.00 59.33 1958 ' 66 (1947-49=100) (1947-49.100) Calendar Years 1950_
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