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.
Section 179 / Bonus Depreciation
Jan 04, 2013
Due to the passage of the new tax law this week, we have gotten several questions about Section 179 and bonus depreciation. A couple of questions are as follows:
"Can you please expand on the extension of section 179? For 2012, will the limits remain at $139,000/$560,000 or do they increase to $500,000/$2mil. For 2013, are the amounts $139,000/$560,000 or $500,000/$2mil?"
"Will farm buildings such as shop or equipment storage buildings be eligible for section 179 or bonus depreciation for 2013?"
The answer on the first question is that Section 179 for taxable years beginning in 2012 AND 2013 reverts back to the rules for 2010 and 2011. This means that you can take Section 179 on new or used equipment of up to $500,000 in each year. If you purchase more than $2 million of equipment in any one year, then the amount you can deduct is reduced dollar for dollar. In 2014, the deduction reverts back to $25,000 (assuming no change by Congress). The $139,000 amount originally proposed for 2012 has been eliminated.
On the second question, general farms buildings such as machines shops, barns, etc. are NOT allowed for Section 179. However, single purpose structures such as a hog confinement facility are allowed to be deducted under Section 179. Newly constructed farm buildings are allowed to use 50% bonus depreciation in 2012 AND 2013. This provision is eliminated for 2014 (again subject to change by Congress).
The mechanics of how these rules interact is that you must take Section 179 first, then bonus depreciation second, and regular depreciation on what is left.
As an example, lets assume a farmer buys a new combine for $300,000. He elects to take Section 179 of $100,000 first, then on the remaining $200,000, he is entitled to $100,000 bonus depreciation and finally, the remaining $100,000 has a depreciation deduction of 10.71% for the first year of $10,710. His total deduction for the year is $210,710.
Now let's assume the combine is used. Using the same numbers, he takes Section 179 or $100,000, no bonus depreciation and $21,420 for a total deduction of $121,420 or about $90,000 less than a new combine.
In general, if you purchase farm equipment of less than $500,000 in 2012 and/or 2013, you will be able to deduct 100% of the purchase. If you build a new shop or other farm building in 2012 or 2013, your net deduction for either year will be about 52% of the cost to build.