It is not often that I post on orchards or vineyards, but one of the new provisions from the tax extenders bill is the ability for orchards and vineyards to deduct 50% of the cost of trees or vines in they year of planting instead of the year the plant is placed into service. The Income Tax Code normally requires all of the costs of planting an orchard or vineyard where it takes at least two years to reach production to be capitalized. These costs include the plants, all of the direct input costs (fertilizer, chemicals, etc.), indirect costs such as labor, depreciation, etc. These costs are accumulated and once a commercial crop is harvested, the farmer is allowed to start depreciating the trees or vines over 10 years and take bonus depreciation at that time.
However, the farmer now has an election that they can make at the time of planting to deduct 50% of the plant costs for any plantings after 2015 and before 2020 (2018 - 40% and 2019 -30%). If the farmer makes this election, they are prevented from taking bonus depreciation on all of the other costs that are placed in service in a later year. Therefore, it may be wise to not make the election in the year of planting.
As an example, assume an orchardists plants 100 acres of high density orchard in 2016 and spends $500,000 on plants. Over the next three years, he incurs total costs of $2.5 million on all direct and indirect costs on the orchard. He can elect to expense $250,000 in 2016 and then start to depreciate the remaining $2.75 million ($250,000 remaining plant costs plus the $2.5 million of other costs) in 2019 over 10 years. If he had not made the election in 2016, he would be able to deduct $900,000 in 2019 using 30% bonus depreciation with the remaining $2.1 million being depreciated over 10 years. If the trees were placed in service in 2018, $1.2 million of bonus depreciation would have been available. Also, if bonus depreciation is elected in 2016, the farmer likely would not qualify for Section 179 and in our example, they are not entitled to Section 179 anyway since they are over the $2.5 million (indexed to inflation) threshold.
There are cases where this might be a good election for orchards and vineyards, however, care must be taken to make sure you actually improve your after-tax cash flow.