I continue to have the question asked about what will Section 179 be for 2015 and when will we know. Currently, a farmer is only allowed to deduct $25,000 under Section 179 and if the farmer spends more than $225,000 on equipment, then they are not allowed to deduct any Section 179.
Both the House Ways and Means Committee and the Senate Finance Committee have communicated that doing the tax extenders bill before year-end is a priority. It is likely that Section 179 will be at the $500,000 amount and likely that 50% bonus depreciation will be extended too. There is serious discussion about extending these provisions through December 31, 2016 and even some discussion on extending until December 31, 2017.
There is an option that farmers can use to optimize Section 179 even you don't know that actual amount. Here is the structure of the planning:
- First, the farmer determines the total amount of farm equipment that they will purchase during the year (either already bought or will buy),
- Second, the farmer enters into a deferred payment contract for the amount of equipment purchases. These deferred payment contracts will be in addition to the normal amount of grain a farmer sells via deferred payment contracts.
- Third, if Section remains at the current $25,000 level, the farmer reports the extra grain income sold via a deferred payment in 2016 (as they normally would).
- Fourth, if Section 179 is increased to $500,000, the farmer will elect to bring deferred payment contract income into 2015 and use it to offset the Section 179 deduction.
Care must be taken to have a few deferred payment contracts since the election to report income is on a contract by contract basis. Second, if you do report this income in 2015, make sure you don't report it in 2016 too.
Let's look at an example:
Farmer Bean would like to optimize his farm income at $150,000 for 2015. He has already purchased a new farm tractor for $325,000 and plans to spend about $150,000 on additional farm equipment. He has already optimized his farm income at the $150,000. Since he knows he will be spending $475,000 on equipment that might be available for Section 179, he goes and enters into 6 deferred payment contracts. Two of these contracts are for $200,000 each and four of them are at $25,000. If Congress does not increase Section 179, he does nothing with the contracts and reports the grain sales in 2016 and his 2015 income remains at $150,000. However, if Congress bumps Section 179 to $500,000, he decides that $450,000 of Section 179 is his optimum amount. He reports the two large deferred payment contracts and two of the smaller ones on his 2015 tax return. This brings $450,000 of income into 2015 which he then uses $450,000 of Section 179 to bring his income back to $150,000.
The bottom line for our farmers is that they flexibility that other business taxpayers do not have and can take advantage of Section 179 even if they don't know what the allowed amount is.