By: David Marrison, Associate Professor and Extension Educator
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. Section 179 Expensing and Accelerated First Year Depreciation allowances have allowed business to write off capital expenditures immediately minimizing taxable income or creating a loss from these schedules.
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.
While it is a great tax incentive, there are limits to Section 179. The main limitation is the total cost of the deducted equipment in 2012 cannot exceed the total amount of the taxable income you are reporting. Under current law, the dollar limit is $139,000 in 2012 and will be $25,000 each year thereafter. The maximum threshold for total of equipment & software that can be purchased under this provision has increased to $560,000. Any amount not utilized in the current year can carry forward. New or used equipment and certain software are eligible for this deduction.
Accelerated First Year Depreciation for 2012 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 December 31, 2012.
The Future- With 2012 being an election year, anything is possible with regards to the percentage and limitation amounts for I.R.C. § 179 Expensing and Accelerated First Year Depreciation. Farmers should watch the actions of Congress and plan accordingly. With the reduction of the I.R.C. § 179 to $25,000 and the potential elimination of accelerated first year depreciation in 2013, farm business should examine if 2012 is the time to consider a capital equipment purchase. Be careful, however, to not the let the tax tail, wag the business dog. Because depreciation is an amortized deduction, purchasing assets which are to be depreciated to reduce your tax liability may not be the best use of your cash. 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.
Loss Limitations-It should be noted for years beginning after 2009, excessive farm losses are not deductible if you receive certain subsidies such as direct or counter cyclical payments. Farmers receiving these payments are limited to the greater of $300,000 or the total net farm income for the prior five tax years. These loss limitations may affect farmers who are receiving oil & gas bonus lease or royalty payments and who are using accelerated depreciation as a method to create a loss on their schedule F to offset the gain from the gas payments. For more information, see the 2011 Farmer’s Tax Guide, page 26.
More information: Additional information on this subject can be found on the Internal Revenue Service’s web page at http://irs.gov. Good resources include Form 4562, Instructions for 4562 and Publication 946-How to Depreciate Property.