Section 179 Expense Deduction and Bonus Depreciation
Farmers have utilized Section 179 Expense Deduction and Bonus depreciation to increase deductions from taxable income over the last few years, but the ability to make use of these as a tax management strategy may be limited in the future.
Agricultural producers over the last few years have made use of both IRS code section 179 Expense Deduction and bonus depreciation but the reliance on these as tax management tools may become limited in the near future.
The section 179 expense deduction allows a business owner to “recover all or part of the cost of certain qualifying property” according to the IRS. 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 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 2013 tax year is $500,000 with a dollar for dollar phase out beginning at $2 million. The limit for the 2014 tax year will be $25,000. There were changes passed in January 2013 for the 2012 and 2013 year. Other tax laws were also changed during this period such as 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 should disappear completely for the 2014 tax year. 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.
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.