Webinar: How New Depreciation Rules will Impact Your Operations
During a webinar hosted by TractorLife.com, presenters Roger McEowen, the Leonard Dolezal Professor of Agriculture Law and Taxation at Iowa State University, and Robert Gunther, CPA and tax specialist with Frost PLLC in Little Rock, Arkansas, discussed the new tax regulations passed by Congress last December as part of the 2010 Tax Act. Information included in this webinar is valuable to farmers for year-end tax planning.
You may read highlights of the webinar in the article below or watch it at your convenience by clicking here. The webinar will be archived at this link for one year.
The clock is ticking for individual farmers and the agriculture industry as a whole to take advantage of tax regulations passed by Congress last December as part of the 2010 Tax Act. Understanding these tax regulations and depreciation rules can deliver significant financial and operational benefits to farmers.
Agriculture industry experts, however, contend that these farm-related tax laws will change again in 2012. Be that as it may, the legislationís current status offers substantial write-offs to farmers for agricultural purchases that may not be available next year.
This article addresses current 2011 and 2012 Section 179 deductions and Bonus Depreciation tax rules, how they impact farming operations, and 2011 year-end tax planning. There are multiple issues for farmers to consider – such as qualifying property and equipment, timing issues for maximizing the benefit of the tax rules, revoking the expense method depreciation election for flexibility in tax planning, differences in bonus depreciation allowances from state-to-state, and strategies to maximize the benefits of these new tax regulations.
Expense method depreciation under Section 179 allows farming operations to deduct up to $500,000 (up from $250,000) for new or used farm machinery and equipment, qualified tangible property purchased and put into service between January 1, 2011 and December 31, 2011, and ìoff-the-shelfî computer software used in the farming operation. Generally intended to benefit small businesses, the deduction is good for equipment purchases up to $2 million. Under current legislation the deduction drops to $125,000 in 2012 and $25,000 in 2013. The equipment purchase phaseout drops to $500,000 and $200,000 respectively each year after 2011.
Leasing farm implements and machinery also qualifies under Section 179. In fact, this may be an extremely effective tax planning strategy because farming operations can acquire up to $500,000 worth of equipment during 2011, put the equipment into service before the end of the year and write it off without spending anywhere near $500,000.
Property and equipment that does not qualify for Section 179 deductions include real property (land, buildings, and other permanent structures); air conditioning and heating equipment; property outside the United States; and inherited or gifted property. (Note: Buildings and land qualify under the Bonus Depreciation option of the 2010 Tax Act addressed below.)
Farmers can make or revoke an expense method depreciation election on an amended return for an ìopenî tax year through 2012. This allows significant flexibility in tax planning on an ìafter-the-factî basis.
It goes without saying that the farm operation must have taxable farm income to qualify for a Section 179 deduction. In addition to farm income, separate non-farm income listed on IRS Form W-2, as well as a spouseís W2 wage income can count toward the Section 179 deduction when a joint return is filed.†
It is well known that a depreciation write-off is an annual income tax deduction that allows for the recovery of the cost of certain property over the time in which the property is in service. Available to any size taxpayer, the bonus deduction rate is 100% for 2011 (up from 50%) and covers new farm machinery only – not used machinery or equipment. Qualified assets must be purchased and placed into service between January 1, 2011, and December 31, 2011. This one-time, 100% deduction accelerates the typical seven-year depreciation write-off. The bonus depreciation will drop to 50% in 2012.
Ideal for very large businesses, the bonus depreciation is advantageous to agriculture businesses that will spend more that $2 million in 2011. While Section 179 is used to offset income, the bonus depreciation may create taxable losses that can apply to prior tax years. There is, however, a $300,000 limit on losses carried back. Also, farming operations with a net loss in 2011 may qualify to carry the bonus depreciation forward to a future year.
The bonus depreciation is not limited to equipment. It can be applied to farm property with a recovery period of 20 years or less, water utility property, computer software, and certain leasehold improvements. Newly constructed farm buildings are also eligible, but must be used exclusively for farm purposes or the buildings will be disqualified for bonus depreciation.
Impacting The Bottom Line
Farmers can work with their tax advisors to use Section 179 deductions and the bonus depreciation in different ways to best improve their tax status and the farmís bottom line. Size of the farmís operation, income, the state where the farm is located, and profit/loss positions are just a few of the factors to be considered when formulating tax strategies.
For example, larger agriculture businesses can apply the entire Section 179 deduction first ($500,000) and then use the bonus depreciation on all qualified purchases. Regular depreciation rules may need to be used on remaining assets. Farmers can use the Section 179 deduction for one type of asset, such as tractors or combines, and the bonus depreciation for other assets to optimize operating profits and losses for tax reduction purposes.
Farmers must also consider the state where their farm is located. The bonus depreciation is recognized and treated differently from state-to-state. Some states accept the bonus depreciation entirely, others allow a percentage less than the full 100%, and some states reject the bonus depreciation entirely. That means that in some states farmers will still depreciate new equipment purchases over seven years. See the chart for state-by-state treatment of the bonus depreciation.
There are also rules for how Section 179 deductions are used in partnerships and S corporations that define how deductions pass through to the owners on a pro-rata basis.
With only one month left until the December 31, 2011 deadline to take advantage of Section 179 and the bonus depreciation, farmers who haven't purchased qualifying assets and put them into service need to act soon, but cautiously.† For instance, placing an order in December for delivery in early 2012 doesnít qualify – the asset must be purchased and in use on the farm before the end of the year. Also, state taxes must be considered. They may be substantial if the farm is located in a state that doesnít accept the bonus. There is an easy-to-use Section 179 calculator to determine potential savings on qualified assets (www.section179.org)
The presenters of the webinar recommend that farmers discuss the new depreciation regulations with their tax consultants before buying new machinery or farm property.