For a recent update on 2014 tax consideration in Ohio agriculture, click here.
Over the past decade, Congress has repeatedly allowed faster depreciation of capital assets to stimulate business investment by providing a “bonus” depreciation allowance in the year the asset is purchased. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the depreciation bonus through 2012 to encourage new equipment purchasing. This was then extended through the end of 2013 by Congress in early 2013. This Accelerated First Year Depreciation or Bonus Depreciation allowance coupled with I.R.C. § 179 Expensing have allowed business to write off capital expenditures immediately minimizing taxable income or creating a loss from these schedules.
Accelerated First Year Depreciation for 2013 is limited to 50% of the purchase price. To qualify, the asset must have its original use begin with the taxpayer (only new equipment) and have a depreciable life of 20 years or less. Virtually all farm-use assets have a depreciable recovery period of 20 years or less, and accordingly are eligible. Bonus depreciation is most effective when applied to assets with a longer recovery period, such as machine sheds and shops (20 years), or drainage tile and culverts (15 years). Currently, the tax law does not extend bonus depreciation past Dec. 31, 2013.
I.R.C. § 179 expensing allows farmers to elect to deduct part or all of the cost of qualifying farm assets in the year they are placed in service. It applies to machinery, equipment, and special use or single purpose agribusiness buildings, such as bins, drying systems, and livestock barns. But it is not available for general purpose agricultural buildings, such as machine sheds and shops, nor is it often available to landlords who purchase or construct properties used by a tenant. New, used equipment and certain software are eligible for this deduction. The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction.
While it is a great tax incentive, there are limits to Section 179. In 2013, this deduction is limited to $500,000 and is scheduled to plummet to $25,000 in 2014. The total amount of Section 179 claimed cannot exceed the total amount of the taxable income the farmer is reporting for 2013. Under current law, the dollar limit after which the maximum deduction allowed is reduced dollar for dollar remains at $2 million for 2013. This investment will drop to $200,000 in 2014.
What’s the difference between Section 179 and Bonus Depreciation? The most important difference is both new and used equipment qualify for the Section 179 Deduction as long as the used equipment is “new to you” while Bonus Depreciation covers new equipment only. There are rules that prevent the sale of equipment between related parties. When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation.
The future? With the dis-functionality of Congress, it is hard to get a good read if farmers will get an 11th hour extension with regards to the percentage and limitation amounts for I.R.C. § 179 Expensing and Accelerated First Year Depreciation. In more normal times, there would be a good chance the Section 179 deduction would stay closer to $500,000 versus $25,000. However, this is not a normal time in Congress and with bigger fish to fry with another round of government shutdown talks, farmers should not count on any changes to Section 179 and bonus depreciation for 2014. And if there are changes, it may not be until after the Mid-term elections.
With the reduction of the I.R.C. § 179 to $25,000 and the potential elimination of accelerated first year depreciation, farm business should examine if now is the time to consider such a capital equipment purchase. If you are having a very good year and need to upgrade or get new equipment, it may be a good move to do this before the end of the year. Be careful, however, not the let the tax tail wag the business dog. If you have started the construction of new grain bins or other larger projects, make sure those are finished by year-end as these items need to be placed in serviced before the end of the year to get the deduction.
A warning exists. If farmers have been using these measures and have financed their equipment, they may find their tax bill going up since they now have income with no tax depreciation to help offset it and still have to make equipment debt payments. Evaluate your current situation to determine if purchasing depreciable assets is appropriate. Consultation with a tax professional is highly suggested. Don’t buy “new paint” or “new steel” without first doing a comprehensive cost analysis.
Additional information on Accelerated First Year Depreciation or Bonus Depreciation allowance coupled with I.R.C. § 179 Expensing can be found on the Internal Revenue Service’s web page at http://irs.gov.