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Publication 225
Farmer's Tax Guide

For use in preparing 2002 Returns

Acknowledgment:

The valuable advice and assistance given us each year by the National Farm Income Tax Extension Committee is gratefully acknowledged.


Limited Liability Company (LLC)

An LLC is an entity formed under state law by filing articles of organization as an LLC.

An LLC with two or more members is classified as a partnership for federal income tax purposes unless it elects to be taxed as a corporation or was formed before 1997 and was taxed as a corporation. An LLC with one member is not treated as a separate entity for income tax purposes unless it elects to be taxed as a corporation.

If an LLC is not treated as a separate entity, its member reports the LLC income and expenses on Schedule C or C-EZ (Form 1040) or Schedule F (Form 1040) as if the LLC were a sole proprietorship. If the LLC is classified as a partnership, it files Form 1065. If the LLC is classified as a corporation, it files Form 1120. If the LLC is classified as a corporation and makes the election to be taxed as an S corporation, it files Form 1120S.

If an LLC is treated as a partnership, see Publication 541 for information on partnerships. If it is treated as a corporation, see Publication 542 for information on corporations.

Corporation

The rules you must use to determine whether your business is taxed as a corporation changed for businesses formed after 1996. However, if your business was formed before 1997 and taxed as a corporation under the old rules, it will generally continue to be taxed as a corporation.

Businesses formed after 1996.   Certain businesses formed after 1996 are taxed as corporations. They include the following.

  • A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic.
  • A business formed under a state law that refers to it as a joint-stock company or joint-stock association.
  • Any other business that elects to be taxed as a corporation by filing Form 8832.

For more information, see the instructions for Form 8832, Entity Classification Election.

Forming a corporation.   A corporation is formed by a transfer of money, property, or both by prospective shareholders in exchange for capital stock in the corporation.

If you transfer property (or money and property) to a corporation in exchange for stock in that corporation, and immediately afterward you are in control of the corporation, the exchange is usually not taxable.

If, in an otherwise nontaxable exchange, you also receive money or property other than stock, you may have to recognize gain. See Publication 544 or Publication 542 for more information.

Corporate tax.   Corporate profits are taxed to the corporation. If the profits are distributed as dividends, the dividends are taxed to the shareholders.

In figuring its taxable income, a farm corporation generally takes the same deductions that a noncorporate farmer would claim on Schedule F (Form 1040).

Form 1120 and Form 1120-A.   Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. A corporation must generally file Form 1120 to report its income, gains, losses, deductions, credits, and to figure its income tax liability. However, a corporation may file Form 1120-A if its gross receipts, total income, and total assets are each under $500,000 and it meets certain other requirements. For more information, see the instructions for Forms 1120 and 1120-A.

More information.   For more information on corporations, see Publication 542.

S Corporation

An S corporation is a qualifying corporation that elects to have its income taxed to the shareholders rather than to the corporation itself, except as noted next under Taxes. Its shareholders include in income their share of the corporation's nonseparately stated income or loss and separately stated items of income, deduction, loss, and credit.

To make this election, a corporation, in addition to other requirements, must not have more than 75 shareholders and each must consent to the election.

Taxes.   Although it is generally not liable for federal income tax itself, an S corporation may have to pay the following taxes.

  1. A tax on the following items.
    1. Excess net passive income.
    2. Certain built-in gains.
  2. The tax from the recapture of a prior year's investment credit.
  3. LIFO recapture tax.

An S corporation may have to make quarterly estimated tax payments for these taxes.

Form 1120S.   An S corporation files Form 1120S.

More information.   For more information on S corporations, see the instructions for Form 1120S.

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