PA Inheritance Tax: Family Farm vs. Business Exemption

Pennsylvania has three separate inheritance tax exemptions for farm and business families, each with its own conditions and its own list of who may inherit. Families often assume the PA inheritance tax family farm exemption covers everything on the farm. Sometimes it doesn’t, and sometimes the one that applies is the family-owned business exemption. Here they are side by side, then which one fits.

Start with one question: who owns it?

Check the deed or ownership records first. The Department of Revenue says the two agricultural exemptions apply to transfers between individuals and do not extend to real estate held in a business entity. If the farm sits inside an LLC, partnership or corporation, the decedent’s interest may qualify under the family-owned business exemption instead (Inheritance Tax Informational Notice 2014-01).

The three exemptions side by side

	Business of agriculture	Farmland “other”	Family-owned business
Statute	72 P.S. § 9111(s)	72 P.S. § 9111(s.1)	72 P.S. § 9111(t)
Covers	Real estate devoted to the business of agriculture, including farm buildings used in it	Agricultural commodities, agricultural conservation easements, agricultural reserves, agricultural use property, forest reserves	An interest in a sole proprietorship or in an entity carrying on a trade or business
Who can inherit	Members of the same family	Lineal descendants or siblings only	Members of the same family
Tests	At least $2,000 of gross income a year from the business of agriculture	No income test	Fewer than 50 full-time equivalent employees and net book value of assets under $5 million at death; in existence five years before death
For seven years after death	Stays in the business of agriculture	No continuing requirement	Stays owned by family members or a trust solely for them
Annual certification	Yes	No	Yes
If the conditions stop being met	Tax recaptured with interest	Not applicable	Tax recaptured with interest
Claimed on	Schedule AU (REV-1197)	Schedule AU (REV-1197)	Schedule C-SB (REV-571)

All three require a timely filed inheritance tax return (72 P.S. § 9111(s), (s.1), (t)(1)(ii)).

What each one requires

Business of agriculture real estate: § 9111(s)

This covers farmland and the buildings used in farming, including land leased to family members or to a company they own, if it is directly and principally used for agriculture (72 P.S. § 9102). A farmhouse on a qualifying parcel is presumed to be part of the farm. Land leased to unrelated third parties does not qualify, and equipment, cash and other farm assets are not covered (Informational Notice 2012-01).

Each new owner certifies every year for seven years that the land is still farmed and earns at least $2,000, and must notify the Department within 30 days if it stops. When it stops, the tax on the land’s date-of-death value comes back, plus interest from the date of death, as a lien on the land and a joint and several personal obligation of the owner at that time and of the beneficiaries of any trust that owns it (72 P.S. § 9111(s)(1)-(3); Informational Notice 2012-01).

Farmland “other”: § 9111(s.1)

The simpler agricultural exemption covers the categories defined in 72 P.S. § 9122(a), such as agricultural commodities (plant and animal products), land under an agricultural conservation easement and forest reserves of ten acres or more. There is no use period, income test or annual certification (Informational Notice 2012-01). The limit is who inherits: only lineal descendants or siblings.

Family-owned business: § 9111(t)

Beyond the size and age tests in the table, an entity must be wholly owned on the date of death by the decedent, family members, a trust solely for them or an entity they solely own. Its principal purpose must not be managing investments or income-producing assets (72 P.S. § 9111(t)(5)(ii)). Property the decedent moved into the business within a year of death is not covered unless it was moved for a legitimate business purpose (§ 9111(t)(2.1)).

The ongoing test is ownership, not use. If the interest leaves the family within seven years, or an owner fails to certify, the tax is recaptured with interest (§ 9111(t)(2), (4)).

Which one fits you?

These are illustrations of how the rules apply, not client matters.

Your father owns the farm in his own name and leaves it to your sister and his nephew

Section 9111(s) can reach both. “Members of the same family” covers the decedent, his brothers and sisters, aunts and uncles, great-aunts and great-uncles, the ancestors and descendants of all of them, and their spouses (72 P.S. § 9102). Section 9111(s.1) would cover your sister but not his nephew, your cousin, who is neither his lineal descendant nor his sibling. A grandchild of his would qualify under both.

The farm is held in a family LLC

Look at § 9111(t), not the agricultural exemptions, and run the entity tests. An entity that only owns and leases out land is likely to fail the principal-purpose test (72 P.S. § 9111(t)(5)(ii)(D)), and the Department answers no for a business whose sole purpose is managing and leasing real estate (Inheritance Tax Q&A).

The family business isn’t a farm

For a machine shop, a contractor or a distribution company, only § 9111(t) of these three can apply. Our business succession planning work starts with these tests.

The heirs expect to sell within a few years

Under § 9111(t), a sale outside the family within seven years brings the tax back. Under § 9111(s), it comes back if the land stops being farmed or earns less than $2,000 in any year of that period. The recapture is the tax that would otherwise have been due at the ordinary Pennsylvania inheritance tax rates. If a sale is likely, plan for it now; our post on ways to reduce Pennsylvania inheritance tax covers other options.

Two details that cost families the exemption

Filing on time. The return is due nine months after death, and the Department may grant a six-month extension (72 P.S. § 9136(d)). A return claiming these exemptions is treated as timely if filed within one year after that due date, including an extended one (72 P.S. § 9166).

Assets outside the exemption. Farm machinery and equipment are not exempt under either agricultural exemption and are reported separately (REV-1197 instructions). Our guides to assets subject to PA inheritance tax and to Pennsylvania inheritance tax cover the rest of the estate.

Frequently asked questions

Is farm equipment covered by the family farm exemption?

No. Neither agricultural exemption covers machinery or equipment; it is reported separately on the return.

Can a niece or nephew inherit the farm tax-free?

Under § 9111(s), yes, if the land is on a timely return, stays in farming with at least $2,000 of gross income a year for seven years, and the certifications are filed. Section 9111(s.1) is limited to lineal descendants and siblings.

What if we stop farming part of the land within seven years?

Tax is recaptured on any tract no longer devoted to the business of agriculture, with interest from the date of death, and the owner must notify the Department within 30 days.

How we work with families and business owners

The first conversation is usually about how the farm or company is owned, who should end up with it and whether they will keep it for seven years. If you decide to go ahead, we give you a written fee proposal before any work begins.

Joseph F. Leeson III trained and practiced as a CPA before he practiced law, with four years in tax accounting. He holds a JD from Indiana University Maurer School of Law and an MBA in accounting from DeSales University. He was born and raised in Bethlehem, and practices at Leeson & Co.

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This post explains general principles of Pennsylvania law and is not legal advice for your situation. These exemptions have strict conditions and filing requirements. Please speak to us before relying on one.

Family-Owned Business or Family Farm? Which Pennsylvania Inheritance Tax Exemption Applies to You