The Farm CPA
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.
Maximum Section 179 Remains at $500,000 for Many Farmers
May 08, 2012
With the rapid changes in the bonus depreciation and Section 179 deduction for 2010 to 2012, I thought I would update our farmers on how much Section 179 is available.
For bonus depreciation of new equipment, if the asset is placed in service between Jan. 1, 2012, and Dec. 31, 2012, 50% bonus depreciation is available.
Section 179 rules are a little different, since these provisions are based upon when your fiscal year begins. Many farmers have a C corporation and if their fiscal year begins in 2011, they can take a Section 179 deduction of up to $500,000. For fiscal years beginning in 2012 (including the normal calendar year), a farmer can take Section 179 of up to $139,000, and the phase-out of this deduction begins at $560,000.
Let's show an example:
Farmer Smith has a C corporation with a year beginning Sept. 1, 2011, and ending Aug. 31, 2012. The corporation purchases a new tractor for $300,000 on Nov. 1, 2011, a new combine for $350,000 on March 1, 2012, and two used tractors for $375,000 on June 1, 2012.
The corporation will be able to fully deduct the new tractor bought in November, and then has to make a choice on the new combine bought in March for $350,000. If it does not take Section 179, the 50% bonus depreciation creates a $175,000 deduction plus normal depreciation of $18,750, or $193,750 total. If it takes the full Section 179 on the tractors of $375,000, this leaves $125,000 to apply against the combine, leaving $225,000 available for bonus depreciation, resulting in $112,500 plus depreciation of $12,053, or total Section 179 and depreciation taken of $249,554. In this case, taking the Section 179 of $125,000 results in a larger total deduction by about $56,000.
If this farmer was a calendar year taxpayer, he would not be able to take any Section 179 on the 2012 purchases, since the total cost of $725,000 exceeds the Section 179 phase-out amount of $699,000 ($560,000 plus $139,000).
Remember, you have to take Section 179 first, then apply bonus depreciation on new assets and depreciate any remaining amount using normal tax depreciation methods.