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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Active Offsets Passive - Passive Does Not Offset Active

Aug 19, 2011

We had a reader ask the following question:

"I will have a sizable amount of income from a gas lease bonus in 2011. I also have a dairy farm. Can I use the 100% bonus depreciation or the 100% depreciation in section 179 depreciation this year on qualifying new or used equipment to offset that gas lease income even if the dairy farm shows a loss or a small profit this year? Thanks"

The short answer to this question is yes.  If the owner of the farm materially participates in the business of the farm (which is my assumption in this question), then whatever loss is created by the use of 100% bonus depreciation on new equipment is allowed to offset the income generated by the gas lease.  However, if the farmer is buying used equipment and wants to take Section 179 on the equipment, he would only be able to take enough Section 179 deduction to soak up the income from the dairy.  He would not be able to increase the dairy loss to offset the gas lease income.

Conversely, let's assume that the gas lease generated a loss during the year and the dairy generated income.  This gas lease loss would not be allowed to offset any of the dairy income during that year (this assumes the taxpayer has no other passive income and his income is greater than $150,000).

Remember the following chart:

  • Ordinary loss offsets Ordinary income
  • Ordinary loss offsets Passive income
  • Passive income offsets Ordinary loss
  • Passive loss offsets Passive income to the extent of Passive income
  • Passive loss does not offset Ordinary income

 

Passive income is generally any rental activity or an investment in a business where you have limited ownership or management roles.

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