It is important to know what qualifies as a building or structure now that the Section 179 deduction for 2010 and 2011 is $500,000 and there’s a 50%/100% bonus depreciation for 2010 through 2012.
To recap, the 50% bonus depreciation applies to new assets acquired between Jan. 1, 2010, and Sept. 8, 2010, and all assets in 2012; the 100% bonus depreciation applies to new assets placed in service between Sept. 9, 2010, and Dec. 31, 2011.
In general, any farm building can be depreciated over 20 years. If you buy a farm that has a barn, machine shop, etc., those buildings will be 20-year property, which qualifies for bonus depreciation as long as it is new property.
Bonus depreciation can make a dramatic difference in taxable income. For example, if you spend $350,000 to build a state-of-the-art machine shop and office, this would normally be depreciated over 20 years and the depreciation deduction would be about $13,000. However, with bonus depreciation, you are entitled to an immediate deduction of up to $350,000. If you are in the top federal bracket, this will save you $122,500 in 2010 or 2011, depending on when the building was put in service.
The Hard Part. When it comes to single-purpose agricultural structures (SPAS), you would generally qualify for:
- a Section 179 deduction of up to $500,000 in 2010 and 2011;
- bonus depreciation on the remainder of the cost (for new construction in 2010); and
- the net remaining amount being depreciated over 10 years, not 20 years.
Unlike bonus depreciation, Section 179 can be taken on used property, not just new property. Therefore, if you buy a farm with these structures already on the property, you may take a Section 179 deduction on those items.
SPAS are defined as single-purpose livestock structures or single-purpose horticultural structures. A single-purpose livestock structure is any structure specifically designed, constructed and used (1) for housing, raising and feeding a particular type of livestock and its produce (such as eggs from a chicken), or (2) for housing the equipment necessary for housing, raising and feeding such livestock.
A hog confinement facility, milking parlor, etc., qualifies. A structure that handles more than one type of livestock does not qualify. A building with movable wall partitions that is used to store grain and machinery does not normally qualify for Section 179.
Dedicated grain bins (not flat grain storage) and certain other commodity storage structures may also qualify for these benefits. Commodity storage structures requiring specific temperatures, humidity levels, atmospheres and air movement may qualify for depreciation over seven years, although the Internal Revenue Service treatment is not as certain. In essence, these structures are viewed as large items of equipment.
Be Careful. Don’t use these structures for anything other than their intended purpose, or you might jeopardize your Section 179 qualification. For example, if you have a hog building with an attached shop that can be used to work on row crop equipment, this part of the structure does not qualify for Section 179 and it may taint the entire building.
If you optimize construction of SPAS in 2010, 2011 and 2012 you might be able to fully deduct $1 million over the two years in Section 179 deductions, take bonus depreciation of 50%/100% on costs from 2010 through 2012 and deduct the remainder over 10 years. Remember that most states will not allow the $500,000 Section 179 deduction for 2010 and 2011.
Also, many states do not allow bonus depreciation, so you will be required to maintain separate depreciation schedules if you farm in these states.
If you follow these rules you can potentially save more than $350,000 in federal income taxes in 2010 through 2012.