2015 Section 179 Expense Deduction and Bonus Depreciation again up in the air
The inability of the U.S. Congress to deal with federal tax code issues could make it tough for businesses that use the Section 179 Expense Deduction Special Depreciation Allowance to increase deductions for the 2015 tax year.
This article has been revised to include information for the 2015 tax year.
For a number of years, agricultural producers have made use of both IRS code section 179 Expense Deduction and the Special Depreciation Allowance, also known as bonus depreciation. The reliance on these as tax management tools may again become limited due to Congressional inaction. Over the past few years, these tax management tools have been made available for a single year and Congress has only acted late in the year, usually in December or even as late as in the first couple of days in January of the new tax year to retroactively make these tax strategies available. Congress’ failure to act in a timely manner on such basic tax code places a burden on farms and other small business to appropriately plan throughout the year and leaves them scrambling to manage their business. As it presently stands for the 2015 tax year, Section 179 has a limit of $25,000 with a phase out beginning at $200,000 and no bonus depreciation is allowed unless congress takes action to change this.
The IRS section 179 Expense Deduction allows a business owner to “recover all or part of the cost of certain qualifying property”. This must be done within the tax year that the property was placed into service. The benefit is that a producer can expense, with limitations, a capital purchase instead of depreciating the item over time using the appropriate number of recovery years. For an item to be able to be “direct expensed,” it must be qualified property.
Qualifying property is property that is eligible, acquired for business use and is acquired through purchase. Eligible property is property that is considered tangible personal property. For example, this includes single purpose agricultural or horticultural structures, machinery and equipment, as well as breeding and dairy livestock and fur-bearing animals.
The limit for section 179 for the previous tax years was $500,000 with a dollar for dollar phase-out beginning at $2 million. The limit for the 2015 tax year will be $25,000. There were also changes passed in January 2013 for the 2012 and 2013 tax years. Other tax laws modified during this period included a permanent increase on the exemption amount for the Alternative Minimum Tax (AMT) and the Estate Tax.
The Special Depreciation Allowance, also known as bonus depreciation, was kept at the 50 percent level for 2013 and 2014 and again disappeared completely for the 2015 tax year unless Congress takes action. Generally, section 179 is used first then bonus depreciation may be used for qualifying property. A point to remember is that bonus depreciation can only be used for original use assets (new not used) while used property may be eligible for section 179.
Fruit farmers are normally not eligible to use bonus depreciation because they have elected out of the Uniform Capitalization Rules (UNICAP). This has allowed fruit growers to expense most pre-productive expenses but requires them to use the Alternative Depreciation System (ADS) and makes them ineligible for bonus depreciation.
In agriculture, as with any other business, one has to make management decision based on the laws that presently exist not what may be. Michigan State University Extension recommends performing the necessary tax planning and financial business analysis using the present law while keeping the changes in mind to determine the best course of action as it deals with capital asset purchases over the next couple of years. Consult your tax professional or local MSU Extension farm management educator if you have questions about your specific situation.