Farmers with larger profitable operations have an unique opportunity this year and next year to have substantial tax savings. The Small Business Jobs Act passed earlier this fall increased the Section 179 deduction from $250,000 to $500,000 for this year and 2011. As most farmers know, Section 179 allows you to deduct up equipment purchases during the year up to the $500,000 limit. It starts to phase out once you purchase $2,000,000 of equipment. For almost all farmers, this phase-out will not be an issue, however, you must have taxable earned income greater than your Section 179 deduction.
For example, if you purchase $250,000 of farm equipment and your net farm income is only $150,000 (including your wages and other earned income), your Section 179 deduction is limited to $150,000. You can still take the $250,000 deduction, but the excess is carried over to the next year and subject to the same income limits then.
Buying two new large tractors and a new combine could easily get you to the $1,000,000 level.
Now to optimize your 2010/2011 planning, it is important to purchase no more than $500,000 in equipment this year and then purchase the remaining $500,000 next year to fully maximize your Section 179 deduction for both years (or make sure you have at least $500,000 of equipment purchases in each year).
Let's see how this might work for a farm operation.
If we have a farmer that purchases $1 million of equipment in this year and none in 2011, they can expense $500,000 this year under Section 179 and depreciate about $54 thousand for a total deduction this year of $554 thousand. In 2011, they can depreciate about $96,000 for a total deduction between the two years of $650 thousand.
Now, if the farmer purchases $500,000 this year and $500,000 next year, they will be able to deduct the full $1 million over the two years. This is an extra deduction of $350,000 or tax savings of about $125,000 if they are in the highest tax bracket.
If you live in a state with an income tax, you may not be able to deduct the full amount for state income tax purposes, but you will not lose the federal deduction.
Remember to optimize your equipment purchases for this year and next to take full advantage of the Section 179 deduction increases.