When it comes to tax breaks, depreciation of equipment can help recover substantial machinery costs for farmers. Last year's stimulus package gave ag producers a perk by reducing the depreciation recovery period for farm equipment from seven years to five years.
First year depreciation for seven year property is 10.71% and for five year property it is 15%, says Lance Fulton, a tax consultant with Kennedy & Coe.
"This means on a $100,000 tractor purchase, you will receive an additional $4,290 of depreciation expense under the five year recovery period,” Fulton says.
In order to meet qualifications for this reduced depreciation, equipment must be purchased by December 31, 2009.
The current change to the depreciation schedule is only in effect through 2009, but farm equipment dealers are lobbying to make the shorter depreciation schedule permanent in the next rewrite of the tax bill.
In addition, the stimulus package includes an extension of bonus depreciation from 2008 into all of 2009, adds Paul Neiffer, a CPA with the firm Hanson & Neiffer in Central Washington.
This means that all new equipment (including single purpose ag buildings) qualifies for 50% of the cost being deducted in 2009 with remainder being depreciated over the normal tax life of the equipment, Neiffer says.
For example, if a farmer bought a new tractor for $150,000 in 2009, the old law would have allowed a normal depreciation of about $16,000. Under the new law, the farmer can deduct $75,000 plus about $11,000 for a total of $86,000. There is no income or cost limits on this deduction, Neiffer says.
What can you depreciate?
Most types of personal property, such as machinery, equipment, vehicles and some livestock can be depreciated. Bonus depreciation also can be used on first calf heifers, grain bins and other single purpose agricultural facilities, Fulton advises.
"Basically, if it's a business property, it's depreciable,” he says.
To claim a depreciation deduction, you must be the owner of the property. Certain capitalized lease transactions will also qualify for a depreciation deduction.
The Internal Revenue Service (IRS) has extended the section 179 deduction for up to $250,000 for another year, reminds Neiffer. This means that farmers can depreciate 100% of any equipment -- new or used -- up to $250,000. It is subject to an income limitation, however, so make sure to check with your tax consultant, Neiffer says.
"This deduction also will phase out once you hit $800,000 of purchases for the year,” he adds.
Don't forget that farmers can now amend previous years to take advantage of section 179 deduction, Neiffer reminds. "This would be applicable if you want to use farm income averaging, and it can really help reduce your income taxes for those years,” he says.