Will This be the Last Year of 100% Bonus Depreciation
100% bonus depreciation is scheduled to drop to 80% bonus depreciation starting in 2023. Certain long-term assets have an extra year (such as orchard plantings). Bonus will drop by 20% each year thereafter until finally there is no bonus depreciation starting in 2027.
However, Section 179 is still scheduled to be fully available and the current amount of Section 179 deduction allowed is $1,080,000 and the phase-out of the deduction starts once you place eligible assets into service of $2,700,000 and no Section 179 deduction is allowed after $3,780,000 of assets placed in service for that year.
Most farmers do not purchase more than $2.7 million of farm equipment in one year, however, 100% bonus allows farmers to fully deduct all farm assets including shops, barns and machine sheds. You can't take Section 179 on these assets.
Bonus depreciation has only really been around for about 20 years. It was started as a result of 9/11 to jump start the economy. The effect on the budget is not that great since this is not an extra deduction but rather just a timing of the deduction and most depreciation under bonus is taken in the 10 years of the budget window.
There is nothing currently indicating an extension of 100% bonus depreciation but it may be part of any extenders bill enacted after the election. We will keep you posted.
Also, remember it may make more sense to take full Section 179 instead of bonus depreciation on your farm equipment. Section 179 can only take farm income down to zero on entity returns and any excess is carried forward to the following return. On your personal Form 1040, you can deduct more than Schedule F income if you have wage income or other income that qualifies.
The nice feature about Section 179 is any excess carried forward is allowed to be deducted on Schedule F in following years and will reduce SE tax. Excess bonus depreciation (that creates a loss) can only be carried forward or back as part of a net operating loss (NOL) and can only offset up to 80% of taxable income and does not reduce SE tax.
I personally am starting to take more Section 179 versus 100% bonus depreciation. Many farmers are in states that do not allow bonus depreciation or limited Section 179 deduction. In those states you certainly should try to deduct as much cost as you can using the de minimis election.
