Depreciation Tax Provisions That Benefit Farm and Ranch Businesses
By Scott Gammill and Rob Gunther, CPA, Frost PLLC
In December 2010, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) in an effort to stimulate the economy. This legislation includes important depreciation and Internal Revenue Service Section 179 deduction changes to encourage spending by businesses. These changes were retroactive to September 2010, and benefit both large and small businesses. If you’re planning to purchase farm and ranch equipment for your operations within the next five years, you need to be aware of these provisions and what is in effect for 2012. Let’s take a look.
In 2012, the law allows 50 percent first-year bonus depreciation for qualifying new assets, such as tractors, breed stock, equipment, fencing, furniture, grain bins, feed mills, land improvements, large trucks (100 percent business use and weighing over 6,000 pounds), machinery, computers and most purchased software, barns and other farm buildings. The “placed-in-service” deadline is between January 1, 2012 and December 31, 2012 and extended to 2013 for certain assets that have longer production periods, including transportation equipment and aircraft. Farmers and ranchers need to understand that bonus depreciation terminates at the end of 2012, so act quickly.
For example, if you purchased a new Ford F-250 (five-year property) or a new tractor (seven-year property) for $60,000, the depreciation deduction would be bonus depreciation of $30,000, plus the first-year depreciation of $4,500 or $3,213, for the assets respectively. (See accompanying chart.)
First Year Tax Deduction For Investment in Farming Equipment
In addition to the bonus depreciation change, in March 2011, the IRS issued the 2011 inflation adjustments to the depreciation limitations for automobiles and light trucks (weighing under 6,000 pounds). For new passenger autos used solely for business, which qualify for bonus depreciation, the depreciation limit is $11,060 for the first tax year. Bonus depreciation also applies for light trucks and vans used for business purposes, but have a slightly higher limit of $11,260 for the first tax year.
For used or previously owned passenger automobiles (other than trucks or vans) placed in service during calendar 2011 to which bonus depreciation does not apply, the depreciation limit is $3,060 for the first tax year. For trucks and vans in this category, the limit is $3,260 for the first tax year.
Please note that the above limitations for automobiles and light trucks were in place through December 31, 2011. Although 2012 limitations have not yet been released by the IRS, we do not expect significant changes.
Other Provisions to Review
The 50 percent first-year bonus depreciation rules apply for both regular tax and alternative minimum tax (AMT) purposes; therefore, assets subject to the bonus depreciation rules have exactly the same depreciation deductions for both regular tax and AMT.
If a taxpayer determines that 50 percent bonus depreciation is not beneficial, it’s possible to elect to take no bonus depreciation. This election is made by asset class, so it’s not an all-or-nothing proposition.
Farmers and ranchers need to be aware of the increased tax benefits provided for in the recent tax relief act. In 2012, the tax benefit of Section 179 will be adjusted to $139,000 (adjusted for inflation) with a phase-out threshold of $560,000. As a planning note, if Congress does not extend this provision, beginning in 2013, the maximum deduction will be $25,000. This is a $114,000 reduction in the amount which can be expensed this year. If you are considering capital expenditures, 2012 is the year to make the investment for tax purposes.
Eligible assets for the Section 179 deduction are similar to qualified bonus depreciation assets with the exception of land improvements. Nevertheless, farmers and ranchers may have assets that would qualify for the Sec. 179 deduction that might at first appear to be land improvements. Some such assets include fencing, water wells, waste-water improvements, grain bins, other storage tanks and silos.
In contrast to qualified bonus depreciation property described above, Section 179 property can be either new or used. It’s important to note that Section 179 expensing can be combined with bonus depreciation for an even greater tax benefit. However, this deduction cannot create a net operating loss for the taxpayer. There is no such limitation on bonus depreciation deductions.
Additionally, the state where your farming and ranching operations reside can drive the determination of whether bonus depreciation or Section 179 expensing will benefit you most from a state income tax perspective. States vary across the board regarding acceptance of either bonus depreciation or Section 179 deductions.
In the end, these tax provisions can impact your operation through 2012 and give you the opportunity to increase your after-tax cash flow and, ultimately, your bottom line. As always, for more information or specific questions about your situation, consult your tax professional or call Frost PLLC at 501-376-9241.
The following chart indicates the present value tax savings created by bonus depreciation for a $100,000 investment in equipment purchased for farming use.
Author Scott Gammill has over 25 years consulting experience in tax depreciation matters, real estate and construction with an emphasis in agribusiness industries. He is the Managing Director of Cost Segregation Services at Frost PLLC. Contact him at firstname.lastname@example.org or 501.975.0120.
Contributor Rob Gunther, CPA, has extensive tax and consulting experience in agribusiness with specific focus on the poultry, egg, pork and cattle industries. He is a Tax Partner with Frost PLLC in Little Rock, Arkansas. Contact him at email@example.com or 501.975.0112.