The Farm CPA: Machinery Tax Matters

April 4, 2012 11:39 AM

Q: We have purchased a lot of equipment during the last five years and have written it all off either using Section 179 or bonus depreciation. I know that bonus depreciation is supposed to go away in 2013 and I have heard that Section 179 is being reduced dramatically. What are the chances that bonus depreciation will be extended and Section 179 increased?

A: After the Sept. 11, 2001, terrorist attacks, Congress placed into law bonus depreciation provisions to help stimulate the economy. At the time, bonus depreciation was only 30%, and it later increased to 50% for just a couple of years. In reaction to the economic stresses of 2008, Congress reinstated bonus depreciation at the 50% level and in 2010 increased it to 100% for the
Sept. 9, 2010, to Dec. 31, 2011, time period. This year, it reverted back to 50% and will go away in 2013.

Section 179 for many years was limited to $25,000 or less. Again, due to economic stresses, the limit was substantially increased to $250,000 and then $500,000 for 2010 and 2011. For 2012, the limit is $139,000.

My concern with these deductions is that farmers are addicted to them, making it extremely hard to quit cold turkey in 2013 if Congress does not change the laws. For example, imagine a farmer who purchased $250,000 of farm equipment each year for five years, using Section 179 and bonus depreciation, and has been able to write off the cost of this equipment against his farm income. After these deductions, his net farm income is about $200,000 each year.

In 2013, he does not purchase any equipment and wants to pay off the debt incurred on the purchases. Suddenly, his net farm income goes from $200,000 to $450,000, and his tax bill is $125,000 instead of $50,000. His cash flow is $75,000 lower than expected.

If, instead, the farmer paid cash for his equipment, his cash flow would be $75,000 lower for taxes and $250,000 higher for not buying equipment, but still worse off than he planned.
Both President Obama and Congress have proposed extending 100% bonus depreciation this year, but with an election and the focus on raising revenue, the chances of this passing are unknown. Any word on increasing bonus depreciation for 2012 or extending bonus depreciation to 2013 won’t be heard until late 2012 or 2013.

There has been talk about making bonus depreciation permanent since the deduction is strictly a matter of timing, not an extra deduction.

With regard to Section 179, I believe that this deduction will be increased for 2013 to at least the 2012 amount adjusted for inflation—I’m guessing $150,000 or so. However, since it’s an election year, all bets are off on this happening soon or even at all.

Q: My father just passed away and I inherited all of his farm equipment, which I will use in my farm operation and perhaps sell part of it. I have no idea what he paid for this equipment and how much depreciation he took on it. Somebody mentioned a step-up in basis, but I am not sure what that is.

A: When you inherit farm equipment or farmland from a decedent, the tax law allows you to adjust the value of this property to what it was worth at the time of death ("step-up" or "step-down"). If an estate form 706 is filed, this value will be listed on the form; use it as your cost on your depreciation schedule. These assets do not qualify for bonus depreciation or Section 179 and are depreciated using normal lives and methods.

This provision eliminates the need for the heir to track down old invoices for purchases or review the decedent’s depreciation schedule. However, it is important to make sure you know whether an estate tax form 706 was filed. If one was filed, you are bound by those values; otherwise, you might determine what you believe to be the fair market value—but document how you arrived at it and be reasonable.

Paul Neiffer is a tax accountant with CliftonLarsonAllen and author of the blog The Farm CPA. He grew up on a wheat farm in Washington and owns a corn and soybean farm in Missouri. Contact him at

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