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Tax Incentive Reminder

February 29, 2012
By: Fran Howard, Contributing Writer

Bonus depreciation for equipment set to expire at end of 2012

If you’re thinking about buying new equipment, 2012 is your last chance to take advantage of bonus depreciation.

While 100% bonus depreciation came to an end in 2011, producers will still be able to write off 50%

of the purchase price of new equipment until the end of this year.

An extension of this tax incentive is unlikely in the foreseeable future.

Expense method depreciation, known as Section 179, also decreases this year, from $500,000 for the 2011 tax year to $139,000. Section 179 depreciation can be used on new or used equipment.

Changes Ahead. This past year, Sen. Amy Klobuchar (D-Minn.) and Rep. Wally Herger (R-Calif.) introduced bills to permanently reduce the depreciation schedule for agricultural equipment from seven to five years.

"Those bills are not going to go anywhere," says Roger McEowen, a professor of agricultural law at Iowa State University and director of the Center for Agricultural Law and Taxation. S. 700, which was introduced on March 31, 2011, has stalled in the Senate Finance Committee, and H.R. 1747 was referred to the House Ways and Means Committee in May but has stalled there.

Providing an accelerated depreciation schedule for farmers is probably not a top priority of Congress. "It’s an election year and if Congress cuts taxes for one group, whose taxes will increase?" says Gary Hoff, Extension taxation specialist for the University of Illinois. "I have doubts there will be any major tax bill until after the election."

McEowen agrees, saying next year will be the big year for tax legislation. "We could see something pass in late 2012 because there are so many tax provisions that expire at the end of this year," he adds.

With a still fragile U.S. economy, an estimated $1.1 trillion budget deficit for 2012 and a debt load of more than $15 trillion, it is highly uncertain what will happen to corporate and personal tax laws moving forward. McEowen notes that income tax revenue collected from corporations was at an all-time low in 2011, partly due to the 100% bonus depreciation provision for capital expenditures, which was part of an economic stimulus package.

A farmer interested in taking advantage of bonus depreciation on a new tractor that cost $500,000 would first depreciate using Section 179’s expense election of $139,000. Then he’d apply the 50% bonus depreciation to the remaining depreciable balance of $361,000, leaving $180,500 to depreciate over seven years.

"Those who didn’t take advantage of last year’s 100% bonus depreciation missed the best opportunity—provided Congress doesn’t change something," says Ron Haugen, Extension farm management and taxation specialist with North Dakota State University. However, 2012 still offers opportunity for those who need equipment.

"A lot of producers use accelerated depreciation to save taxes, but they need to question whether that is in the best interest of their operation and whether they need the new equipment," Haugen says. "I always ask producers whether they are buying the equipment or machinery just to save taxes."

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