In reality, the purpose of most farming companies coming into existence was to take advantage of Ireland’s low corporation tax rate (currently at 12.5%). When you compare the marginal tax rates of sole traders of up to 55% (income tax at 40%, PRSI at 4% and USC at up to 11%). It is understandable why a company would be attractive to many farmers.
The benefit of companies only really comes into effect when the farm is producing significant profits above what the farmer requires to live and support their family in a year. A benchmark commonly used is the €100,000 figure. This benchmark is used as an indicator to begin examining the possibility of incorporating. It applies to those who, after all farm, personal and tax expenses are paid in a year, have an additional income of circa €100,000. The rationale behind this approach is simply because a company, for legal and tax purposes, is a person in its own right. Once the farming trade is incorporated, the income of the farm belongs to the company and not the farmer. Treating corporate funds as personal funds will easily put the farmer in breach of company law and create tax issues, both of which carry significant penalties. The farmer will need to extract funds from the company to fund personal expenses. The only two options available to extract funds from the company are dividends and salary (ignoring director loan accounts, which are a topic all on their own). The farmer will incur income tax at up to the above rates on salaries and dividends received from the company. If the farmer needs all or most of the farming profits to fund personal expenses, there is no benefit to creating a company, and the farmer is merely incurring additional accountancy fees and administrative work for no benefit.
Case study
At this point, I would like to introduce you to John and Mary Power, who are currently farming jointly as sole traders. Their son, Sean, is currently undertaking the Green Cert and farming with them part-time, with their younger children, Aisling and Oscar, also interested in farming. As 2022 farm profits increased significantly, John and Mary have increased production in recent years and are seriously examining the possibility of incorporating the farming trade.
Background information
John and Mary’s net farming profits in 2024 are expected to be circa €150,000.
Personal, household and school fee expenses, etc, are expected to be €60,000.
Medical expenses of €1,000 for the entire family were paid by John.
Tuition fees of €5,000 for Aisling and Sean.
John and Mary are taxed under joint assessment, with John being the assessable spouse.
Personal tax credit for 2024 €1,875 or €3,750 combined for John and Mary.
The earned income credit for 2024 is €1,875.
The 2024 standard rate for a married individual is €51,000, with an increase of up to €33,000 for the non-assessable spouse’s income.
PRSI is 4%
2024 USC thresholds are per the table below:
| Threshold | Rate |
|---|---|
Income up to €12,012 | 0.5% |
Income from 12,012 to €25,760 | Income from 12,012 to €25,760 |
Income from €25,760 to €70,044 | 4% |
Income above €70,044 | 8% |
Non-PAYE income above €100,000 | 3% |
Under this scenario we will examine John and Mary’s income tax liability:
| Description | EUR |
|---|---|
| Taxable income | 150,000 |
| Tax as follows: | |
84,000 @ 20% | 16,800 |
66,000 @ 40% | 26,400 |
| Total income tax | 43,200 |
| Less tax credits | |
Personal tax credit (by two) | 3,750 |
Earned income tax credit (by two) | 3,750 |
Tuition fee credit (€5,000 - €3,000) @ 20% | 400 |
Medical expense credit (€1,000 @ 20%) | 200 |
| Total tax credits | 8,100 |
| Add PRSI and USC | |
PRSI – John (75,000 @ 4%) | 3,000 |
PRSI – Mary (75,000 @ 4%) | 3,000 |
| USC John | |
12,012 @ 0.5% | 60.06 |
13,748 @ 2% | 274.96 |
44,284 @ 4% | 1,771.36 |
4,956 @ 8% | 396.48 |
| USC Mary | |
12,012 @ 0.5% | 60.06 |
13,748 @ 2% | 274.96 |
44,284 @ 4% | 1771.36 |
4,956 @ 8% | 396.48 |
| Total PRSI and USC | 9805.72 |
| Total Tax Payments | 44,905.72 |
Under this scenario, John and Mary would pay € 44,906 in tax and have after-tax profits of €105,094, giving an effective tax rate of 30%.
2. Under this scenario, the farming trade has transferred to a company, and John and Mary receive a salary of €30,000 each from the company to fund personal expenses.
Corporation Tax
| Description | EUR |
|---|---|
Profits before salaries | 150,000 |
| Less salaries | |
John's salary | 30,000 |
Mary's salary | 30,000 |
| Taxable profit | 90,000 |
| Corporation tax @ 12.5% | 11,250 |
John and Mary's income tax liability on the salary
| Description | EUR |
|---|---|
Taxable income | 60,000 |
| Tax as follows | |
60,000 @ 20% | 12,800 |
| Total income tax | 12,800 |
| Less tax credits | |
Personal tax credits (by two) | 3,750 |
Eared income tax credit (by two) | 3,750 |
Tuition fee credit (€5,000 - €3,000) @ 20% | 400 |
Medical expense credit (€1,000 @ 20%) | 200 |
| Total tax credits | 8,100 |
| Add PRSI and USC | |
PRSI – John (30,000 @ 4%) | 1,200 |
PRSI – Mary (30,000 @ 4%) | 1,200 |
| USC John | |
12,012 @ 0.5% | 60.06 |
13,748 @ 2% | 274.96 |
4,240 @ 4% | 169.60 |
| Total PRSI and USC | 3,409.24 |
| Total tax payments | 8,109.24 |
The combined tax cost for the company, John and Mary under this scenario is €19,359. Giving a combined effective rate of tax on the profits of 13%. With this level of additional income using a company significantly reduces the tax bill and provides a tax saving of circa 17% or €25,547.
3. Under the next example we will reduce the taxable profit of the farm to €80,000 while keeping John and Mary’s personal expenses at €60,000 per annum.
John and Mary income tax liability
| Description | EUR |
|---|---|
| Taxable income | 80,000 |
| Tax as follows | |
80,000 @ 20% | 16,000 |
| Total income tax | 16,000 |
| Less tax credits | |
Personal tax credit (by two) | 3,750 |
Earned income tax credit (by two) | 3,750 |
Tuition fee credit (€5,000 - €3,000) @ 20% | 400 |
Medical expense credit (€1,000 @ 20%) | 200 |
| Total tax credits | 8,100 |
| Add PRSI and USC | |
PRSI - John (40,000 @ 4%) | 1,600 |
PRSI - Mary (40,000 @ 4%) | 1,600 |
| USC John | |
12,012 @ 0.5% | 60.06 |
13,748 @ 2% | 274.96 |
14,240 @ 4% | 569.60 |
| USC Mary | |
12,012 @ 0.5% | 60.06 |
13,748 @ 2% | 274.96 |
14,240 @ 4% | 569.60 |
| Total PRSI and USC | 5,009.24 |
| Total tax payments | 12,909.24 |
Under this scenario, John and Mary would have a tax liability of €12,909 with after-tax profits of €67,091, giving an effective tax rate of circa 16%.
4. In this example, we will keep the farm profit at €80,000, but the farming trade has been incorporated into a company. John and Mary still require € 60,000 in personal funds to cover personal expenses.
Corporation tax
| Description | EUR |
|---|---|
| Profits before salaries | 80,000 |
| Less salaries | |
John's salary | 30,000 |
Mary's salary | 30,000 |
| Taxable profit | 20,000 |
| Corporation tax @ 12.5% | 2,500 |
John and Mary's income tax liability on the salary
| Description | EUR |
|---|---|
| Taxable income | 60,000 |
| Tax as follows: | |
60,000 @ 20% | 12,800 |
| Total income tax | 12,800 |
| Less tax credits | |
Personal tax credit (by two) | 3,750 |
Earned income tax credit (by two) | 3,750 |
Tuition fee credit (€5,000 - €3,000) @ 20% | 400 |
Medical expense credit (€1,000 @ 20%) | 200 |
| Total tax credits | 8,100 |
| Add PRSI and USC | |
PRSI – John (30,000 @ 4%) | 60.06 |
PRSI – Mary (30,000 @ 4%) | 1,200 |
| USC John | |
12,012 @ 0.5% | 60.06 |
13,748 @ 2% | 274.96 |
4,240 @ 4% | 169.60 |
| USC Mary | |
12,012 @ 0.5% | 60.06 |
13,748 @ 2% | 274.96 |
4,240 @ 4% | 169.60 |
| Total PRSI and USC | 3,409.24 |
In this scenario, with only an additional income of €20,000, a company would not make sense, as the combined tax liability of the company plus John and Mary’s income tax liability is €10,609, giving an effective tax rate of 13%. As John and Mary’s income tax liability was only €12,909, if they were taxed on the full €80,000 of profits, the saving with the company is only €2,300. The additional costs associated with setting up companies and administrating them would likely outweigh the tax saving of setting up a company.
Summary
While generally, it is more tax-efficient to farm through a company, the personal needs of the family must be considered. It is only when the farm generates significant income over the personal expenses of the family that incorporation is of benefit.