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November 2013 Archive for 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.

Final Net Investment Income Regs Have Good News For Farmers

Nov 28, 2013

We have had several posts in the past about how the proposed net investment income tax Regulations indicated that cash or crop-share rents paid by a farmer's operation to him or a pass-through entity would be subject to the 3.8% net investment income tax.

In Final Regulations issued earlier this week, the IRS changed their interpretation of this rule and have now indicated that any self-rented real estate or rental real estate that has been properly grouped with a material participation entity will not be subject to the tax. In even better news, any gain from selling this type of property will also be exempt from the tax.

Therefore, if a farmer has created a LLC to own farm land which rents the land to his schedule F operation, this will not be subject to the 3.8% net investment income tax.

However, if you are an active investor in farmland property and do not have any farm operation or never had a farm operation, in these cases, it is likely that your rental income will be subject to the new 3.8% tax. This would include any gain from selling the land.

On a personal note, this is how I spent part of my Thanksgiving day in Los Cabos. My wife and I took an hour ride up north of the airport into the hills to go Zip Lining. We had a great time, but I have a feeling my wife and I will be in bed early tonight.

Capture

Happy Thanksgiving!

Nov 27, 2013

I wish everyone a very Happy Thanksgiving. This is the time of season to reflect on all of the things to be thankful for and I know one of my reasons is all of the readers of the Farm CPA blog. Make sure not to eat too much tomorrow and touch base with your friends and family.

I will be spending time with my wife in San Jose del Cabo and we even found a turkey in the local Mega supermarket, however, I am pretty sure that is not what I am having for dinner.

Again, HAPPY THANKSGIVING.

Crop Insurance is not Taxed Before Receipt!

Nov 26, 2013

We have gotten several calls and emails from readers and clients regarding when crop insurance is taxed. The confusion seems to relate to the revenue programs where the crop insurance received is based on price not yield. The confusion arises since these types of claims can not be deferred. However, if the crop insurance claim is received in 2014 for damage arising in 2013, the proceeds are taxed in 2014 when received. For cash basis farmers (which are almost all farmers), crop insurance proceeds are taxable when received (not necessarily the year of loss).

Now if you receive these proceeds in 2013, they will be taxable then. However, if you receive them next year, you have effectively deferred them for one year.

On a personal note, I am spending 10 days on vacation in San Jose del Cabo with my wife (somehow no kids are coming along, so this must be a true vacation). On the flight down yesterday, I noticed how much good ag land is not being farmed down here. I would think most of it relates to a lack of water, but if they could ever get water here, great crops would result.

Senate "Pool" Process to Increase SE Taxes?

Nov 24, 2013

The Senate proposals on tax reform contain a new method of computing depreciation as discussed in our last post. With this new pooling process, it appears that in many cases, farmer's self-employment taxes will be greater than under current law.

For example, if a farmer purchased a new tractor in 2010 for $300,000 and fully depreciated it using bonus depreciation, this reduced his self-employment income by $300,000. Now let's assume he sells it in 2013 for $175,000. This sale is treated as ordinary income, however, it is not subject to self-employment tax. He can take the $175,000 of sales proceeds and use it to purchase another piece of farm equipment and fully depreciate it using Section 179 which reduces his SE income by this amount.

Now, with the new Senate tax proposal, the sale of farm equipment does not automatically flow to Form 4797 where it is now reported. It simply is reflected as a reduction to the pool account and only if you end up with a negative pool amount at the end of the year do you report it on Form 4797. This means that most farmers will no longer be able to report equipment sales at a gross amount and then use the proceeds to purchase farm equipment to reduce SE taxes. The sale simply gets homogenized with other farm equipment purchases, thus reducing the farmer's flexibility in the timing of sales, etc.

Also, the trade-in of farm equipment no longer results in a deferral of gain. Rather, the trade-in value is shown as if it was sold for this amount and run through the pool.

As stated in our previous post, if you do not like these proposed changes, please let your Senator or Representative know NOW.

Senate Proposals on Depreciation

Nov 22, 2013

We posted yesterday on the new Senate tax reform proposals and how it might affect farmers. Today's post will dig even further into the depreciation changes.

First, the positive is that Section 179 has been increased to $1 million from the current $500,000. The proposal also extends the $500,000 limit through 2014 with the new $1 million limit starting in 2015 and then being indexed to inflation in $100,000 increments. This means it would not be adjusted until inflation brings the amount above $1.1 million. In that year, Section 179 would be $1.1 million.

As we discussed, there are now 4 pools of assets. All assets are distributed into these pools and then the net total pool is multiplied by a percentage to arrive at total depreciation for each pool. The Senate seems to believe this would be much easier since you no longer have to account for each asset, however, most farmers have to account for each asset for state income tax purposes, personal property tax purposes and in many cases financial statement purposes. Therefore, I do not believe this to be any improvement.

The pool amount is derived by taking the ending balance from last year, adding all current pool additions, subtracting any sales proceeds. If the sum is a negative, it is reported as a net ordinary gain. If the amount is positive, then an applicable percentage is multiplied. Almost all farm equipment will be placed in pool 2. This pool % is 18%. This is not straight-line depreciation but rather 100% declining balance with no switch to straight-line like current tax law. This means if a farmer invests $1 million in equipment in year one and places it into pool 2 and has no other changes to the pool, it will take 35 years for the asset to be fully depreciated (actually this is the year it drops to less than $1,000 and the law allows you to fully deduct it at that point).

Under current law, this asset would be fully depreciated after 8 years. Under the proposed law, after year 8, about 20% of the asset is still left to be depreciated.

Land improvements such as tiling, irrigation wells, etc. would even take longer to get fully depreciated. Under current law, these assets are fully depreciated after 16 years. They are considered to be 15 year property with a half-year in year 1 and a half-year in year 16. Under the proposed law, over 44% of the asset is still left to be depreciated in year 16 and it takes 135 years to fully deprecate the asset. This is worse than real property be depreciated over 43 years.

Assets falling into pool 3 would take about 55 years to be fully depreciated and this pool includes many assets that would normally be depreciated over no longer than 7 years under current law. Many farmers involved in orchard operations have large controlled atmosphere storage facilities that are currently allowed to be depreciated over 8 years. With the new law, it appears these will be pool 3 assets. This means that after 8 years over 35% of the storage facility is still left to be depreciated and it would take 55 years to fully depreciate it (assuming no other assets in pool 3).

Now for real property. All farm real property is currently depreciated over 20 years except for single purpose ag structures such as a hog confinement buildings which are depreciated over 10 years. The proposed law switches all farm buildings including ag structures to be considered real property depreciated on a straight-line method over 43 years. This is a drastic change for farmers. For farmers owning a house in town that is rented out, this would now stretch the depreciation period from 27.5 to 43 years.

In almost all cases, farmers will be much worse off under the proposed depreciation changes. The only case where they are better off is the increased Section 179 limits and the fact they would now be permanent and indexed to inflation.

I do not believe that all of these changes will pass into law, but it is important to note what is being proposed now. If you do not like these proposals, I suggest writing a letter to your Senator(s).

MAJOR Farm Tax Law Changes Proposed by Senate

Nov 21, 2013

WARNING - This Post is longer than Normal.

The Senate released details on their proposed changes to the income tax laws and there are several major changes proposed that would apply to farmers and many of these changes are major. First, I will list all of the changes that are clearly beneficial to farmers:

  1. Section 179 is increased to $1 million and will phase-out beginning at $2 million. This amount is indexed to inflation in $100,000 increments.
  2. If the taxpayer has gross receipts under $10 million, then the capitalization rules under Section 263A would not apply to such taxpayer. This would exempt capitalization of orchards and vineyards for taxpayers with revenues under this threshold

 

So far, that is the only major changes I found that are favorable to farmers. Here are the changes that might not be favorable to farmers:

  1. Repeal of the automatic deduction for fertilizer costs under Section 180,
  2. Repeal of the special method of accounting for farmers under Section 447,
  3. All businesses would be required to use the accrual method of accounting once their three average gross receipts exceed $10 million (indexed for inflation in $1 million increments). If the cash method of accounting is allowed, inventories can be immediately deducted (which may be a benefit and would offset the repeal of Section 180),
  4. Like-kind rules are eliminated, however, sales of equipment will only be taxable, if the amount received exceeds the cumulative "pool" amount of assets at the end of the year (we cover the pool provisions later in the post),
  5. Involuntary conversions would be subject to a two-year rollover period instead of more favorable four years or more,
  6. All depreciation recapture, including buildings, would be subject to ordinary income tax rates. I also believe that any sale of assets placed in a pool would be ordinary gain even if the sales price exceeded original cost,
  7. The maximum amount that can be depreciated for personal-use automobiles is $45,000 over 5 years,
  8. Percentage depletion is repealed,
  9. Half of advertising expenses are allowed in year one, remainder is amortized over 5 years,
  10. Amortization of most intangible assets are now over 20 years instead of 15 years

 

Depreciation changes are as follows:

You will no longer keep track of individual assets for income tax purposes (if you prepare GAAP financial statements and state income taxes, you may still be required to keep track of separate assets). All non-real estate assets will be placed into one of four pools. Each pool will start with the previous years ending total, add all new assets, subject any sales proceeds and the remaining pool amount will then be multiplied by the following percentage to arrive at the current year depreciation amount:

  • Pool # 1 - 38%
  • Pool # 2 - 18%
  • Pool # 3 - 12%
  • Pool # 4 - 5%

 

That depreciation amount will then be subtracted to arrive the beginning pool amount for the next year. Almost all farm personal property would be part of Pool #2. All land improvements would be part of Pool # 4 and it appears that all farm buildings would be treated as real estate and deducted on a straight-line basis over 43 years. This would include single purpose agricultural structures (currently on a 10 year life).

Bonus depreciation would no longer be available.

For most farmers, the benefit of having $1 million Section 179 should outweigh the costs of stretching out the lives of land improvements and farm buildings. However, for livestock intensive operations such as hog, dairy and poultry farmers, this may be a major negative.

As farming operations get larger, the $10 million gross receipts test will get harder and harder for farms to meet which may lead to the mandatory use of the accrual method of accounting. One benefit is that the current "farm" accrual method may be replaced with a "real" accrual method which would result in income only being realized as sales are made. The current farm accrual method requires income to be reported before an actual sale is made.

All-in-all, I believe there are more negative than positive changes in the proposed Senate bill. There is also a House bill floating around which has many proposed changes different from the Senate. It will be interesting to see what finally gets passed (if anything) and we will keep you posted.

CPR For Section 179

Nov 15, 2013

The University of Illinois publishes a daily blog called the FarmDocDaily. This posting deals with information related to their Illinois farmers and sometimes it covers tax subjects important to farmers. Today, they covered Section 179 and provided a very interesting table related to amount of Section 179 deduction as a % of total depreciation expense on annual basis since 2007. Beginning in 2008, the maximum Section 179 deduction amounts was at least $250,000 and it has been $500,000 for the last four tax years (2010-2013).

For all farms since 2007, the percentage of Section 179 to total depreciation averaged about 70% and in 2012 the number was slightly over 75%. For purchases over $100,000 the percentages has been even higher. Based on this table, it appears that most farmers have just about fully depreciated their farm equipment purchases over the last few years using Section 179. I would guess that the amounts not deducted using Section 179 were further depreciated using 50%/100% bonus depreciation. This leaves very little that can be deducted in 2014 and beyond if Section 179 drops to $25,000 and bonus depreciation disappears.

This can lead to a double whammy (a very technical tax term) for our farmers. First, many are counting on the ability to reduce their income by using Section 179. Second, many of these purchases have been financed with debt and if the asset is fully depreciated in year 1, there is no longer any deduction available in future years (other than minor amounts of interest). This leads to negative cash flows with no tax savings. Farmers tend to forget they got the Section 179 benefit in year one, when they have to pay in future years with no tax benefit.

For example, if a farmer buys a new combine for $500,000 by financing it over 5 years, his cash flow is a negative $100,000 each year for those five years (assume no interest). If he fully depreciates it using Section 179 in year 1, the farmer gets a cash benefit from his tax savings of lets say 35% or $175,000. The farmer is happy in year one. However, in year 2-5, he is in the hole by $100,000 with no tax savings. Conversely, if the farmer could depreciate that straight-line over five years (yes, I know it is seven years, but this is my example), he would save $35,000 each year. It is the case of instant gratification versus getting the benefit over the five-year period.

When times were good (like the last few years), the instant gratification felt great, but if corn stays at $4 and the farmer has to sell extra grain to pay for the $100,000 equipment payments, they may have wished to wait on the Section 179 deduction.

There is a lot of good information on Section 179 regarding Illinois farmers and I would highly suggest reading the post.

New Water Rules Coming?

Nov 14, 2013

We now have a new Food Safety Modernization Act which was primarily a response to the multiple break-outs of E Coli food poisoning over the last few years. The FDA is proposing many new Regulations in response to the new Act. Part of these regulations pertain to water sources used by farmers to irrigate their crops. If the water comes out of a well or from a regulated water source, there may not be too many new Regulations that apply.

However, if the water is from a lake, river, or other surface area, then the Regulations may require a farmer to test their water pathogens as frequently as every 7 days. This would require up to 52 tests per year and my guess is that these tests would not be cheap. The farmers primarily affected grow fruits and vegetables, however, we know over time "regulatory creep" happens and it may apply to other farmers in the future.

We do not have much time to get your opinions to the FDA since the deadline is this Friday the 15th, but if you have an opinion on this, I would certainly make sure to get it in by then.

Here is a summarized fact sheet put out by the FDA.

 

Crop Insurance Deferral Update

Nov 13, 2013

David Repp and I are in Mason City, Iowa today for our second presentation of the Day Two of the The ISU Center for Agricultural Law and Taxation Farm and Urban Tax School. Roger McEowen of CALT and Joe Kristan of the Roth CPA firm presented the first day yesterday. Unlike yesterday in Sheldon when it was 4%, this morning it had warmed up to the teens.

A question regarding the deferral of crop insurance proceeds for two crops was brought up in class today. If a farmer keeps completely separate books and records for each crop, then the farmer is allowed to individually elect to defer the crops maintained under the separate books and records. However, almost all farm operations only keep one set of books. This would require the farmer to determine if they normally report more than 50% of sales from all harvested crops in the year after harvest. You would add the gross sales for all crops and if this number is greater than 50% for most if not all years, then any crop insurance proceeds received this year due to yield loss could be deferred.

This election is for all yield crop insurance claims. You cannot pick corn and skip beans, etc. Most claims this year will be corn and not beans. Other crops such as wheat may have a yield claim too. Remember, the portion of the claim related to price cannot be deferred, only the claim related to yield losses.

Remember that if you collect crop insurance proceeds from a 2013 crop loss in 2014 you have effectively deferred your crop insurance proceeds for one year.

Sale of CRP Land - Is it Subject to the 3.8% Tax?

Nov 12, 2013

We had a reader ask the following question:

"Hey Paul, Is farmland with current CRP Income subject to the additional 3.8% NII tax if sold in 2013. Assuming all other income thresholds are met."

This is one of those questions with multiple answers depending on the facts and circumstances of the taxpayer. As previously discussed, the 3.8% tax will apply beginning in 2013 on net investment income on income over $200/$250,000 adjusted gross income. Rent income is part of the definition of investment income (the IRS proposed Regulations use a very broad interpretation of rent income).

Prior to the Morehouse case decided this summer, most taxpayers reported CRP income as rent income assuming they were no longer a farmer. This income would not be subject to self-employment tax. Farmers most likely reported it as part of their farm income, but in many cases they would report it on schedule E as rent income. If rent income did not rise to the level of a trade or business, the income would normally be subject to the extra 3.8% tax. Gain from selling land that was in CRP and was not part of the farming operation would most likely be subject to the 3.8% tax.

However, with the Morehouse decision, the Tax Court has determined that any taxpayer receiving CRP income is in a trade or business and thus subject to self-employment tax (taxpayers receiving both CRP and social security do not pay the tax by law). Since the income is now subject to SE tax it falls out of the definition of investment income subject to the tax on the ongoing income. However, this trade or business is probably still passive for the non-farmer. Even though self-employment tax was paid, the sale of the land remains a sale of property used in a passive activity. The taxpayer must meet the material participation test on the business income in order to avoid the 3.8% tax on the sale. And if the Morehouse
case is overturned on appeal and the CRP is treated as rents, the land sale will also be subject to the 3.8% tax.

Since the Morehouse case is on appeal and the IRS has not issued final Regulations and this type of gain has not been tried in Court, it may be several years before we have any final conclusions on this subject. If this situation applies in your case, you MUST review your facts with your tax advisor before selling and there may be conflicting conclusions.

Corn Harvest is Winding Down

Nov 11, 2013

On Saturday, I spent all day with my friends Ken and Mary McCauley and their son Brad in NE Kansas helping them finish up corn harvest. They were down to about three or four days to go. The crops got in late and it had been slow going since yields were good and the weather was not always cooperative.

We worked in two separate fields during the day and it was fun to be a little bit helpful in moving equipment around and riding the combine. I even earned my pay when I spotted a 4" log that was about 10' long that wanted to get involved with the corn head. I got Brad to stop the corn head in time and all the damage was to the log.

We got down about 7 that night, I had dinner in the metropolis of Highland, Kansas and then left yesterday morning for the ABA AG Bankers conference in Minneapolis. We had a four-hour session yesterday put on by the FINBIN crew from the University of Minnesota. Dr. David Kohl also spoke and it is very apparent that Ag bankers are starting to have concerns about much lower corp prices and the affect on their borrowers. There is no panic, but certainly concern.

I am only at the conference today and then head to Sheldon, Iowa this afternoon. I will help present tax seminars to Iowa CPAs and tax preparers in Sheldon, Mason City and Ottumwa and then head over to Michigan on Sunday for a two-day meeting, then to Portland Oregon for the Northwest Annual Coop meeting and then home to see if my wife still knows who I am.

If any readers are at these events, please stop me and say HI.

 

Trusts Get Hit with New 3.8% Tax too

Nov 08, 2013

We have had several posts on the new 3.8% net investment income tax applying to individuals with net investment income especially rents. We sometimes forget that this tax will apply to trusts and estates beginning in 2013 and the applicable level is much lower. All the way down to less than $12,000.

This means if a trust owns cash rented farm real estate, then most likely the trust will owe income taxes in excess of 43% federal plus any related state income taxes. In order to prevent this tax, we recommend that the trust distribute enough income to its beneficiaries to get the trust down to a lower bracket.

Sometimes it is hard to distribute the exact amount of income by year-end so the tax provisions allow you to count certain distributions made within 65 days of year-end as being made in the prior year. This allows to match up distributions with trust income.

If you had set up an intentionally defective grantor trust (many farmers did at the end of last year when making large gifts), this tax will not apply to the trust. This is due to the "trust" not existing for income tax purposes, however, the income will be reported on your personal return and you may be subject to the tax at that level.

This new tax is very complex and even the IRS person in charge of drafting the Regulations indicate they are a moving target and subject to change. We have temporary Regulations right now and hope to have final ones by the end of the year. You know that the term "final" in tax law is just until they change it (again).

Crop Insurance Deferral Options

Nov 06, 2013

It appears that at least $5 billion of crop insurance claims have been processed this year and with the approximate $1.20 drop in corn prices from the spring, it is likely that additional corn claims will be made. Unlike last year when almost all claims related to yield losses, this year, most of the claims will most likely be related to price. This will result in different tax options. We had a reader ask the following question:

"Do I understand that part of a FCI indemnity payment can be deferred to next years income? If so, which part, that due to yield loss or that due to price?"

When a crop insurance claim relates directly to a drop in price, those claims cannot be deferred to the next year. When a claim results due to a yield loss, then the claim may be deferred if:

  • The farmer uses the cash method of accounting,
  • The claim is received in the year of loss (if you receive the year after, you cannot defer), and
  • The normal business practice of the farmer is to sell more than 50% of the crop in the year following harvest

 

Almost all farmers use the cash method of accounting, so it is the third rule that trips up most farmers. I was discussing this issue with a client of mine a couple of days ago and I asked whether he sells most of his crop in the year after harvest. Since their year-end is February 28, in most years, usually less than 50% is sold in the year after harvest, so therefore, he could not defer his proceeds. One option to defer is to work with the crop insurance company and make sure the claim is paid after year-end. In his case, that is tougher with the later year-end.

This year will also result in many cases where there is both a yield loss and a price claim. In those cases, you will need to allocate the proceeds between the two claims. You may defer the yield claim (assuming you qualify otherwise), but not the price claim. Here is a good memo from the University of Illinois and Roger McEowen from last year on how to do these allocations. Your crop insurance agent can usually break down these two components for you also.

Update on the Net Investment Income Post

Nov 05, 2013

In our previous post, we gave an example of a farmer selling farm land that was cash rented out and it being subject to the new net investment income tax. This was designed an illustration, but we have gotten feedback that in many cases this 3.8% tax may not apply to a farmer in this situation.

This part of the law can be extremely complex to determine if the tax will or will not apply (there are multiple code sections dealing with this issue). If this situation applies to you, it is extremely important to review your situation with your tax advisor before doing this type of sale. By selling the land in the wrong year or with the wrong set of facts, you may expose yourself to additional tax and the cost could easily exceed $100,000. A $10 million gain could cost you $380,000.

Again, we enjoy getting feedback from our readers and don't worry if you think it will hurt our feelings to be told that we are wrong. I have been married for over 30 years now and I know I am wrong (just a little husband humor).

Everything You Want to Know About Net Investment Income Tax (or Not)

Nov 05, 2013

Tony Nitti does a regular column on Forbes.com and he just released a very good recap of the 3.8% net investment income tax that was implemented by Obamacare, but was not applicable until 2013. Many farmers assume this tax will never apply to them since their adjusted gross income will never be in excess of $200/250,000 since they maximize their available deductions and timing of income.

In most cases, they are correct. However, what about farmers who retire and then start cash renting their farmland. If you have 1,000 acres of good farmland, it only takes $250 per acre cash rent to put you over the threshold. Then, after a few years of cash renting, the farmer elects to sell his farmland. In this case, almost all of the gain will be both subject to the 3.8% net investment income tax and the 20% maximum federal tax plus state income taxes.

Let's look at an example:

  • Farmer Bean owns 1,000 acres of good farmland that he paid $500,000 for in 1988. This land cash rents for $350 per acre and he has $75,000 of other taxable income from social security and investments.
  • His total gross income for 2013 is $425,000 which is $175,000 in excess of the $250,000 threshold amount. Since $175,000 is less than his cash rents of $350,000, his net investment income tax is $6,650 ($175,000 X .038)
  • In 2014, his neighbor offers him $15,000 per acre for his farmland. This results in a gain of $14.5 million. All of this gain is subject to (1) 3.8% net investment income tax; (2) 20% maximum federal income tax; and (3) 9% state income tax for total taxes of $4,756,000 ($14,500,000 X 32.8%).
  • If he had sold the land in 2012, his total taxes would have been $3,480,000 ($14.5 million X 24%)

 

As you can see, by waiting one year, his total taxes from selling the farmland has risen almost $1.3 million.

I do not see this tax getting repealed. As a matter of fact, there are several influential individuals such as Bill Gross, Warren Buffett, etc. calling for the elimination of preferential capital gains treatment. If that happened, this farmer's tax would increase by another 20% or almost $3 million.

We will keep you posted on any details, but it is important to know how the net investment income tax might affect you and I recommend reading Tony Nitti's post. It is done in a question and answer format and should answer most of your questions.

Highlighted Inflation Adjusted Amounts for Farmers

Nov 04, 2013

The IRS just released Revenue Procedure 2013-35 last week updating all of the income tax items that are affected by inflation. Each year right after September 30 the IRS will release these items updated to reflect the annual inflation rate for the year ended September 30. The government is on a fiscal year that ends on that date, so inflation is based on that period, not the calendar year.

The release is 22 pages long and this post will highlight the major changes pertinent to farmers:

  • The top income tax rate of 39.6% is now schedule to begin at $457,600 for married couples and $406,750 for singles. For singles, the 35% tax bracket begins at $405,100 and ends at $406,750.
  • The AMT exemption amount increases to $52,800 for singles and $82,100 for married couples.
  • The standard deduction is $6,200 for singles and twice that or $12,400 for married couples.
  • Phase-out of itemized deductions and personal exemptions now begins at $305,050 for married couples and $254,200 for singles.
  • The lifetime exemption for gifts/estates is now $5,340,000.
  • The maximum amount available for reduction under the Special Use valuations rules of Section 2032A is now $1,090,000.

 

All of these inflation amounts are applicable with 2014 returns and/or dates beginning January 1, 2014.

Some Thoughts on Section 179 and Bonus Depreciation

Nov 03, 2013

Farmers have gotten accustomed to high levels of Section 179 ($500,000 for the last few years) and at least 50% bonus depreciation since 2008.  For 2013 the levels are $500,000 for Section 179 and 50% bonus, however, for 2014, Section 179 is scheduled to drop to about $25,000 and there will be no bonus depreciation.

In a more normal Congress situation there would be a good chance of an increase in Section 179 and perhaps a change to bonus depreciation by the end of this year.  However, this is not a normal time in Washington DC and the fiasco with the Health Exchange rollout may make it worse.  I would not count on any changes to Section 179 and bonus depreciation for 2014 until after the Mid-term elections. 

This means that farmers need to determine their equipment/tax savings plans assuming the lower levels will stay in place.  If you are having a very good year and NEED to upgrade or get new equipment, I would certainly recommend getting it this year.  If you have started the construction of new grain bins or other larger projects, make sure those are finished by year-end.  If done by December 31, you get to deduct an immediate 50%, if done in January, you may only get to deduct 10% of less.

Remember that Section 179 is allowed for new AND used equipment, while bonus is only on NEW equipment.  You cannot take Section 179 on trade-in basis of old equipment, but can use it for bonus.  Section 179 applies to farm equipment and single purpose farm structures and land improvements.  Bonus applies to all farm assets including buildings.

Some farmers who have financed their equipment may find their tax bill going up since they now have income with no tax depreciation to help offset it and still having to make equipment debt payments.  If farm incomes start to drop this may crimp their financial situation.  If this applies to you, take steps now to mitigate it.

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