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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.

How to Time Your Equipment Purchases

Sep 23, 2010

We got a question from a farmer as follows:

"My tax year ends October 31.  I've spent about $250,000 on equipment in the last year.  I am looking at buying a planter which will cost from about $60-90,000.  Should I wait until November or buy it before my year end of October 31."

This is a great question that almost applies to all farmers.  I am going to make a couple of assumptions in this case with my answers to each assumption.

Assumption # 1 - We are assuming that this is probably a C corporation (due to the October 31 year-end) and we are assuming that the farm operation is fairly profitable.  In that case, since the farmer has already spent $250,000 on equipment, for this year, their maximum Section 179 expense deduction of $250,000 has been reached.  Therefore, by putting this equipment into service before year-end, most likely the deduction will only be about 15% of the purchase cost.

Therefore, under this assumption, assuming a budgeted profitable year in 2010/11, we would recommend waiting till November to purchase since the corporation would be able to take a full Section 179 deduction in that year.

Assumption # 2 - The same as assumption #1, however, the farmer will spend at least $200,000 on equipment in 2010/2011 besides the planter, we would recommend that the purchase take place in the current year.  Even though the current depreciation deduction is only 15%, in the next year, the depreciation deduction would be about 25% of the original cost and the farmer will be able to take the maximum Section 179 deduction on other equipment.

Assumption # 3 - The farmer's income is less than the amount of equipment purchased.  In this case, it will not be able to take the maximum Section 179 deduction in the current year.  If the farmer believes his income for 2010/11 will be higher, we would recommend purchasing the equipment in that year to take advantage of the full Section 179 deduction then.

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COMMENTS (3 Comments)

Christopher - Moses Lake, WA
The president is expected to sign the Small Business Jobs Act on Monday. It will extend Section 179 to $500,000 for tax years beginning in 2010 and 2011 and also extend 50% bonus depreciation for calendar 2010. (Your new farm shop, for example, might qualify for bonus depreciation.)

For Section 179, the phase-out will begin at $2 million of qualifying property.

Also, certain real estate improvements will qualify for up to $250,000 of Section 179, with a lower phase-out.

Too many details to describe here...
Chris Hesse, CPA

7:41 PM Sep 23rd
This may answer your question.
The 'Economic Stimulus Act of 2008' generously increased the limits of the Section 179 Deduction. The previous limits were $125,000 for the deduction and the total amount of equipment purchased or leased for the year had to be less then $500,000. The Stimulus Act of 2008 increased the deduction limit to $250,000, and now the total equipment purchased or leased needs to be less then $800,000. It also added a one-time "bonus depreciation" on equipment that exceeded the $250,000 deduction limit.
For more detailed information you can go to www.section179.org
5:37 PM Sep 23rd
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