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Is Your Year-End Purchase Worth It?

October 30, 2013
By: Ed Clark, Top Producer Business and Issues Editor
machinery shed

Take advantage of Section 179 and bonus depreciation allowances on equipment

For most crop producers, 2013 won’t be the highest taxable income year ever, but it will be up there. That means if you haven’t already done so, now might be the time to pull the trigger on equipment purchases the farm needs to be more efficient and profitable.

Bonus depreciation of 50% is in play for 2013, but it is scheduled to disappear Dec. 31. "You can deduct 50% with no limit," says Paul Neiffer, a CPA at CliftonLarsonAllen in Yakima, Wash. "This not only covers new equipment, but any new farm asset," Neiffer says. "For 2014, it’s zero, unless Congress reinstates it."

Equally important, Section 179 of the IRS code allows a deduction of $500,000 for 2013, which is set to change to $25,000 in 2014. Unlike bonus depreciation, Section 179 applies to new and used assets, such as equipment, grain bins and tiling.

GregPeterson 2013 1

"There might be better buys ahead ... Buying new or used equipment becomes very emotional."—Greg Peterson

If you purchase $1 million worth of new equipment in 2013, you can deduct 50% with Section 179, plus bonus depreciation for 50% on the remaining $500,000. The remaining $250,000 must be depreciated during the standard multi-year depreciation schedule, explains Mark Olson, CPA with Conway, Deuth & Schmiesing in Willmar, Minn.

It’s important to note that the Section 179 deduction must be used prior to bonus depreciation. Olson explains that in his example, the farmer cannot take $500,000 in bonus depreciation first and then $500,000 in Section 179 to deduct the entire $1 million in 2013.

One important question for producers who need equipment is whether to buy new or used. The answer depends on each producer’s circumstances and the price of each, Neiffer says. For example, one of his Iowa clients purchased a new tractor this spring, on which he has put quite a few hours. His dealer just offered him the opportunity to trade for a new tractor for just $9,000.

"That means his cost was only $11 per hour," Neiffer says, noting that buying new made the most economic sense. "If there was a $200,000 spread between new and used, he would have been better off with used."

depreciation chart

New or Used? One crucial point is the relationship between the used equipment market and metal bought off the showroom floor.

"In each of the past 11 years, the used equipment index has shot up during the fourth quarter," says Greg Peterson, who tracks the equipment market and is Farm Journal Media’s used equipment expert. "There has been a big market crescendo at the end of the year." Much of this is due to recent tax policy, Peterson says.

This year, the market continues to be red hot and tight. Peterson says the market’s strength is a result of several factors, including a 60% drop in the average number of farm auctions this year compared to 2000 to 2005, increased farm income, a 6% to 8% yearly increase in the price of new equipment and the availability of fast tax write-offs.

Arguments can be made for buying new or used. It’s all about personal preference, how much debt producers are comfortable with and price spreads. For example, dealers are more aggressive in offering multi-unit deals. They will go to producers and say, "I’ll take these three pieces if you buy three or four new pieces," Peterson explains.

The discounts can be significant, and when combined with the tax advantages, there’s strong incentive to buy new, he adds.

Overall, Peterson looks for the used equipment market to remain strong through the end of the year. However, large combines might be softening—there are more of them showing up on dealer lots. "There’s a possible buying opportunity," he says.

For tractors, it’s just the opposite. For example, say you are looking for a good used 150 horsepower tractor. "The dealer already has three guys who want it," Peterson says.

Opportunities Ahead. While tax consequences are huge and the loss of most of Section 179 and all of bonus depreciation are significant, there might be economic reasons for waiting until next year to purchase equipment, Peterson says.

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FEATURED IN: Top Producer - November 2013

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