Starting with the 2026 crop year, the Farm Service Agency (FSA) began treating LLCs, S corporations and similar entities as "pass-through entities." Each member who meets FSA's "actively engaged in farming" criteria will qualify for expanded payments. This contrasts with prior treatment, where LLCs, S corps and similar entities were limited to a single payment limitation. That is why so many farmers used a general partnership or simply farmed as a sole proprietor (Schedule F).

Farming under a general partnership or as a sole proprietor has one major issue: unlimited liability. You may put all your assets -- not just business assets -- at risk. The FSA change has opened the door to revisiting a conversion to an LLC or S corp. Let's look at some key differences between the two.

One major difference between a partnership and an S corp is the way an owner gets paid. In a partnership, owners recognize income on their personal tax returns. To take money out, they "distribute" funds. That distribution is typically tax-free unless their basis goes negative. In an S corp, owners are paid a reasonable wage and issued a W-2. Unlike a partnership, where all income is subject to self-employment tax, only the wages in an S corp are subject to FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. This could provide considerable tax savings. S corp owners can also take additional money out as a distribution. Ordering rules govern the taxability of those distributions: If there is basis in the S corp, distributions up to that basis are tax-free. If additional money is distributed beyond that, it would be treated as a taxable dividend to the extent of the Accumulated Adjustments Account (AAA). Thereafter, it is treated as capital gain. Keep in mind that this is under current tax law.

Another difference between a partnership and an S corp is the ability to have multiple classes of ownership interest. In a partnership, you can have multiple classes with varying economic rights. For example, I've seen arrangements where parents own 75% of a farming partnership, but the children do most of the work. To compensate the children, the parents take only 25% of the profits and allocate 75% to the kids. Partnerships also allow for the transition of ownership through profit interests, a strategy I've written about before. In an S corp, all stock must carry the same economic rights. All taxable income is allocated based on ownership percentage, and likewise, distributions must be proportional to ownership percentage.

One difference between S corps and partnerships that has substantial impact on farms involves the use of debt. In an S corp, an owner can only obtain debt basis by lending money directly to the entity. Loan guarantees on recourse debt do not provide basis. In a partnership, recourse debt can provide debt basis. Why does that matter in farming? Many farms have over depreciated assets and use debt to finance living expenses. This can leave owners without sufficient basis in the entity. To take losses or receive tax-free distributions, they rely on debt basis. In an S corp, that debt basis may not be available, resulting in losses that are suspended or distributions that become taxable.

Now that the rules have changed and farmers can use either partnerships or S corps for asset protection, it's important to understand the entity type you choose. Partnerships offer more flexibility; S corps offer greater tax savings. Since there is no one-size-fits-all answer, a conversation with your certified public accountant or attorney should be your first step before making any decisions.

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DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at https://www.dtnpf.com/…. You may email Rod at taxman@dtn.com..

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