Sound business decisions always trump tax savings, but legislation designed to jump-start the economy has sprouted a crop of deductions that encourage certain investments sooner rather than later. Here's a brief look at some of the breaks you may qualify for—and one you can use if you face red ink this year.
Appreciate Depreciation It's no secret to farmers that depreciation can help recover substantial costs. Last year's stimulus package gave ag producers a perk by reducing the depreciation recovery period for farm equipment from seven years (at 10.71%) to five years (at 15%), says Lance Fulton, a tax consultant with Kennedy and Coe. "This means that on a $100,000 tractor purchase, you will receive an additional $4,290 of depreciation expense," he says. Equipment must be bought by Dec. 31, 2009. This change to the depreciation schedule is only in effect through 2009, but farm equipment dealers are lobbying to make the shorter depreciation schedule permanent.
The stimulus package also extends bonus depreciation through all of 2009, adds Paul Neiffer, a CPA with Hanson Neiffer in central Washington. So, you can deduct 50% of the cost of new equipment (including single-purpose ag buildings) in 2009, with the remainder being depreciated over the normal tax life of the equipment. For example, if you bought a new tractor for $150,000 in 2009, the old law would have allowed depreciation of about $16,000. Under the new law, you can deduct $75,000 plus about $11,000, for a total of $86,000. There is no income or cost limit on this deduction, Neiffer says.
Under the 2009 law, the Internal Revenue Service extended the Section 179 deduction for another year without an inflation adjustment. As a result, farmers can still write off 100% of any equipment—new or used—up to $250,000. The deduction is subject to an income limitation, however, Neiffer says. "It also phases out once you hit $800,000 of purchases for the year," he adds. So make sure to check with your tax consultant about the details.
Furthermore, you now can amend previous years' tax returns to take advantage of the Section 179 deduction, Neiffer points out. "This would be applicable if you want to use farm income averaging, and it can really help reduce your income taxes for those years," Neiffer says.
Operating Loss vs. Income Averaging Unfortunately, some producers—especially in livestock—face negative income this year. If you are one of them, you have a choice of the net operating loss (NOL) rules (IRC Section 172) or the income-averaging rules (IRC Section 1301) to carry those losses back. Under NOL provisions, business and some personal losses can offset income in another tax year; with income-averaging, you use tax brackets from three base years to compute federal income tax for the election year, says Philip Harris, University of Wisconsin ag law professor. Congress made it clear you can't benefit from both, however. So in some cases, deductions may be added back. The calculations are complex, so consult your tax preparer to determine which will net you a bigger savings.
Deduct State Motor Vehicle Taxes If you buy a new truck, car or motorcycle with gross vehicle weight under 8,500 lb. or a motor home between Feb. 17, 2009, and Dec. 31, 2009, you can add the state and local taxes on the purchase price (up to $49,500 per vehicle) to your basic standard deduction. There are provisions for states without sales tax.
The deduction is phased out for taxpayers with modified adjusted gross income between $125,000 and $135,000 ($259,000 and $260,000 for joint filing).
"However, if you choose to deduct the sales tax, you cannot claim the increased standard deduction that also was announced in the 2009 law," says Philip Harris of the University of Wisconsin.
Energy Credits Renewable energy qualifies for production credits (wind facilities through 2012 and others through 2013) or energy investment credits. The previous $4,000 cap on credits for qualified small wind-energy property is eliminated.
"Alternatively, the Treasury Department is awarding cash grants in lieu of the investment tax credit for such property placed in service during 2009 and 2010," notes Philip Harris, University of Wisconsin. "The grants are excludable from gross income—but you can't also claim [the credits mentioned above]."
There are also credits for installing energy-saving features in residential properties and for purchase of alternative-energy vehicles.
Retirement Distributions Deferred To avoid forcing retirees to sell investments at the bottom of the market, there is a provision that if you have an individual retirement account or a defined contribution plan and were due to take a required withdrawal (being 70½ years old or more in 2009), you don't have to take the withdrawal in 2009. It doesn't matter whether or not this was to be the first distribution. This is a one-year-only provision.
Hire a Veteran or Youth You will qualify for Work Opportunity Tax Credits if you hire from two new targeted groups in 2009 or 2010, University of Wisconsin ag law professor Philip Harris reports.
The first group is unemployed veterans who meet the following three criteria: (1) discharged or released from active duty within five years of hiring; (2) served on active duty for more than 180 days or discharged from active duty for a service-connected disability; and (3) received unemployment compensation for at least four weeks during the one year prior to the hiring date.
The second group is disconnected youth who are aged 16 to 24 at hiring and who are not regularly attending secondary, technical or postsecondary school; not regularly employed during the six months before hiring; and who lack sufficient skills to be readily employable.
Top Producer, November 2009