Dumb question, as I am neither a farmer nor a businessperson, but is there a way for a farmer to set up, say, an LLC, which holds money from profitable years for use in unprofitable years, from which the farmer takes a steady salary each year?
This is all well and good, but now you've just shifted the profit to Profit LLC, and what to do with it there? If it's an LLC, whoever owns it has to pay income tax on it. So if you, the farmer, own Profit LLC, you're still paying taxes on it. If Farm LLC owns it, then the profit just goes back to Farm LLC, undoing the whole purpose.
So maybe you decide to make Profit LLC a C-Corp instead, so it's Profit, Inc., with the idea that now it's no longer a pass-through entity. But now you have to pay corporate income tax on it, even if you don't distribute it. Then, when you distribute it someday, you have to pay regular income tax on it again.
Some companies (such as Toys 'R Us) used to get around this by having "Profit LLC" be a company that owns the brand and licenses it to the retail company, to eliminate the retail company's profits. They then locate Profit LLC in a low/no-tax country such as the Cayman Islands. It's not clear how this would work for a farmer, however, because there's not really a brand to license, and any company that owned the land would still fall under US tax jurisdiction.
The US tax system is really insane some times
(Not a lawyer, not a tax preparer.)
Is it even 5%?
Of course they do. They are using legal means to reduce their taxes. Why wouldn't they.
Would you decline your mortgage interest deduction, your solar energy or EV deduction, etc. so you could claim you are paying your "fair" share? Go ahead -- nothing is stopping you.
Which is what the parent of this thread was saying.
The consequence is that in bad times, the company has to borrow (if it can) or goes bankrupt. Which happens often. We don't generally shed tears over this kind of thing, but this story points out the human tragedy that passes when individuals follow the same strategy.
Personally I kinda feel a little meh about the subject. My heart goes out to every struggling business(wo)man - it's hard to make it on your own. But farmers are especially insulated against market forces by a giant morass of subsidies and land use regulations. They're already getting a much bigger handout than they deserve.
Smaller businesses yes.
Big businesses get even more subsidies than farmers -- and not just subsidies.
[1] https://www.bloomberg.com/news/articles/2017-03-10/ten-thing...
Paul Graham, The Acceleration of Addictiveness
It has also been my observation that there is a sort of victim mentality that many farmers embrace, they can be legitimate multimillionaires but would rather be seen as poor and bullied by the banks, government and elites.
The debate about double taxation of corporate profits relates to taxation of dividends, which are neither exempt nor deductible from a business' taxable income. Because shareholders are one and the same as the corporation according to some strains of legal and economic reasoning, by taxing dividends you've taxed the shareholders' profits twice.
If you control a corporation, you could achieve the same tax treatment as pass-through entities merely by paying yourself a salary instead of dividends. But if you did that, pass-through entities are easier because there are fewer formalities involved. The real gripe is that because dividends are taxed at a flat 15-20%, paying yourself in tax-preferred dividends is a tantalizing prospect but-for the supposed double taxation "problem".
The debate is admittedly a little more nuanced when discussing passive investments, but that's a different context than family farms.
https://www.sba.gov/blogs/6-things-you-need-know-about-your-...
Getting creative, of course... But you know, a legitimate business would never operate like this, right?
They wouldn't take such a "subjective" point of view, when interpreting what are typically held as "objective" values and facts with only one single interpretation of The Truth, right?
Oh, wait...
Edit: Yes, I meant distribute for taxation purposes (K1 form), not actually transfer the funds
Edit: you can’t keep an untaxed rainy day fund, that’s true. If you keep cash in the business from one year and use it on expenses the following, you deduct those expenses for the year they occurred. If that incurs a net operating loss you can carry that loss backwards or forwards if you want.
In the cross-tax-year case, you pay the chargeback from the historical profits you have been booking from the LLC and book it as a business expense in the current tax year.
If you are running an LLC with zero cash backup to handle such situations, there could be a problem with the business model.