Unless you just awoke from a very, very long winter’s nap, you know that on December 22 President Trump signed what has been called the “biggest tax overhaul in 30 years” and “historic tax reform.” According to the Tax Policy Center's analysis of the final bill, 80% of Americans get a tax cut, 15% will see no change, and, per The Washington Post, “5 percent of people will pay more next year. Mostly, those are folks who earn six figures and own expensive houses in places with high local taxes, such as New York and California.”

What does it mean for farm families?

The personal income tax rate reductions and increased standard deduction are minor improvements. If you itemize to deduct residence mortgage interest and personal taxes paid, losing those deductions might put you in the five percent.

More significant is the corporate rate reduction to 21% from the former 35%. However, most farm families don’t operate as a C-corp. The main disadvantage of a C-corp is that after the company pays income tax on its profits, in order to get the remaining funds out for personal use you have to declare a dividend to the owners, which is taxed again as income to them. A C-corp can be appropriate for a family that is pretty sure they will never, ever sell land, and want to always reinvest a portion of their land income (rent) into the purchase of more land. However, I have met at least ten farmers who wish they did not have a C-corp for every farmer who is glad they have, or wish they had, one. It is probably not right for you.

But the biggest news for family farmers is the new concept of “qualified business income” (QBI) and the 20% deduction of income from a pass through business entity. The precise application to any specific taxpayer is extremely complicated (I spent too much of my Christmas vacation trying to sort it out!) but by and large, it looks like most farm families will benefit.

Let’s say as a sole proprietor you earn self-employment (SE) income of $150,000. This is your QBI, and instead of paying tax on the full $150,000 you will be able to deduct 20% ($30,000) from your income, and pay tax on $120,000. Very nice.

If your income is higher than the threshold amount ($157,500 for an individual and $315,000 for married taxpayers) you can’t simply deduct 20%, however. If you are in this situation, you might benefit from creating two new businesses, separated from your operation: equipment leasing and land owner. Each new business would be owned by a pass-through entity such as a limited liability company (LLC). As the self-employed farmer, you would then rent your equipment from the one and your land from the other. Your SE income goes down, while the LLCs may qualify for the 20% deduction on QBI.

As with anything that promises tax savings, spend some thoughtful time and invest in expert advice before you take the bait! This new tax law may motivate some farmers to form a new pass through business entity to maximize this 20% tax break. But forming an LLC is not as simple as filling out some forms and filing them with the state.

There are a variety of benefits of operating in a business entity. If the QBI tax break is going to motivate you to go to the hassle of forming the entity, make sure you get all possible benefits. In the right situation, the right type of entity can:

The way you form it now can have dramatic impact on the benefits later. Consider the following as you design your entity:

If you create an entity to get the QBI tax deduction, start with the end in mind. Business entities often undermine estate planning objectives, but a well-designed entity will make estate plan work better.

Ferguson owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.