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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.

The Coming Fiscal "Section 179" Cliff

Nov 28, 2012

We had a reader ask the following question:

"179 depreciation is scheduled for $25,000 in 2013 do you think this will be changed? If not how would it work on a pivot worth $71,000. ? $25,000 first year and remainder $46m over 6 years ?"

I am sure that the major equipment manufacturers such as Deere, Case IH are actively asking this same question.  These manufacturers (and farmers) have enjoyed the benefits of 100%/50% bonus depreciation and Section 179 of up to $500,000.  This year, bonus depreciation is 50% and Section 179 is limited to $139,000.

As the reader says, next year Section 179 drops all the way back to $25,000 and there is no bonus depreciation.  For the answer to his calculation question, he would take Section 179 of $25,000 leaving $46,000 to be depreciated over seven years as follows:

  1. Year 1 - 9.38%
  2. Year 2 - 19.13%
  3. Year 3 - 15.03%
  4. Year 4-7 12.25% each year
  5. Year 8 6.13%

 

These percentages may change a little bit if the mid-quarter convention applies.

Therefore, his total depreciation deduction for 2013 would be $25,000 plus $4,315 for a total of $29,315.

As to his question on whether this will be changed, we may know this by the end of the year or we may not.  With the major push for revenue raisers, it may be tough to get much of an increase, however, when they score this over a ten year budget window, the net effect on the budget is fairly minor due to deduction simply being a timing of the deduction, not an extra deduction.

If Section 179 and bonus depreciation remains as is, the  effect on farmers and farm equipment manufacturers will most likely be dramatic since many farmers will now have a year of little depreciation (all soaked up with bonus and Section 179) and buying equipment at year-end may yield a very minor depreciation deduction.  This may result in their equipment loan payments coming out of cash flow with no or little tax deduction.  This can be the worst case scenario.

We shall keep you posted.

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