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.
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.