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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.

How Does Section 179 Work?

Aug 11, 2014

A reader sent us the following question:

"I am wondering how many dollars worth of used machinery I can purchase and use for 2014 income deduction. I do not understand Section 179."

I get this question fairly often especially regarding how much Section 179 farmers can use for 2014. The current law is that a farmer can deduct up to $25,000 of equipment purchases incurred in 2014, however, if the farmer purchases more than $225,000, then they will not be able to take any Section 179 at all (it is phased-out dollar-for-dollar above $200,000).

As mentioned in previous posts, we believe that Congress as part of their lame-duck session after the Mid-Term elections and before December 31, 2014 will enact legislation to increase Section 179. Now whether this is back to the old $500,000 level (the amounts for 2010-2013) or a number lower (or perhaps higher), nobody knows right now. Two years ago, Congress did increase it back to $500,000 in December, and both the Senate and the House have proposed making it $500,000 or even a $1 million, but none of those proposals have made it to law and Congress is officially on vacation until September and even when they get back, no tax laws will be passed before the election.

Now for how Section 179 works:

  • This is a special upfront deduction that is allowed on the purchase of any farm asset with a life of 15 years or less (about everything other than farm buildings);
  • It is based on your year beginning in (so November 30, 2014 year-end corporations still have a $500,000 deduction limit since their year began in 2013);
  • After the deduction is taken, if the equipment is new, then 50% bonus depreciation will be taken (assuming that comes back into play);
  • After any bonus depreciation is taken, then the remaining amount is subject to normal depreciation rules.

Let's go through an example:

Farmer Anderson purchases a new tractor for $350,000 in 2014. Under current law, he could no take Section 179 on the tractor or any bonus depreciation. If the 2014 law was the same as 2013, he could take Section 179 expense on the whole tractor or any portion thereof. Let's assume he takes Section 179 of $100,000. This reduces his cost basis to $250,000. 50% bonus depreciation would be $125,000 bringing this cost basis for depreciation down to $125,000. This is depreciated over 7 years with an assumption of a half-year depreciation in year one on a 150% declining balance method (faster than straight-line). This results in a depreciation deduction of about $13,400. Therefore, under the old 2013 law, Farmer Anderson could deduction a total of $238,400 (he could also deduct the full amount). Under current law, he can only take depreciation of about $37,500.

If the tractor had been used, then no bonus depreciation would be allowed.

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