During the next month, I will be on the road across Ohio helping to teach the OSU Income Tax Schools. These workshops help teach tax professionals about the latest changes to the IRS tax codes. Today, I would like to remind farmers to push the numbers with their pencil to determine their potential tax liability in 2013. Even though corn and soybean prices have taken a nose dive this fall, farmers may still have relatively high income levels due to selling the majority of their crops from 2012 in 2013.
There are two main ways which farmers lower their tax liability. The first is by purchasing inputs for the next cropping season before the end of year. The second is by purchasing equipment and then writing the majority of the cost off through accelerated measures offered by the Internal Revenue Service.
There are some major changes on the horizon in 2014 which may mean farmers may need to act before the end of the year.
Over the past decade, Congress has repeatedly allowed faster depreciation of capital assets to stimulate business investment by providing a “bonus” depreciation allowance in the year the asset is purchased. This Accelerated First Year Depreciation or Bonus Depreciation allowance coupled with I.R.C. § 179 Expensing have allowed business to write off capital expenditures immediately minimizing taxable income.
Accelerated First Year Depreciation for 2013 is limited to 50% of the purchase price. To qualify, the asset must have its original use begin with the taxpayer (only new equipment) and have a depreciable life of 20 years or less. Virtually all farm-use assets have a depreciable recovery period of 20 years or less, and accordingly are eligible. Bonus depreciation is most effective when applied to assets with a longer recovery period, such as machine sheds and shops (20 years), or drainage tile and culverts (15 years). Currently, the tax law does not extend bonus depreciation past Dec. 31.
I.R.C. § 179 expensing allows farmers to elect to deduct part or all of the cost of qualifying farm assets in the year they are placed in service. It applies to machinery, equipment, and special use or single purpose agribusiness buildings, such as bins, drying systems, and livestock barns. But it is not available for general purpose agricultural buildings, such as machine sheds and shops, nor is it often available to landlords who purchase or construct properties used by a tenant.
New, used equipment and certain software are eligible for this deduction. The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify. While it is a great tax incentive, there are limits to Section 179. In 2013, this deduction is limited to $500,000 and is scheduled to plummet to $25,000 in 2014.
So what should farmers do? With the dis-functionality of Congress, it is hard to get a good read if farmers will get an 11th hour extension with regards to the percentage and limitation amounts for I.R.C. § 179 Expensing and Accelerated First Year Depreciation. In more normal times, there would be a good chance the Section 179 deduction would stay closer to $500,000 versus $25,000. However, this is not a normal time in Congress and with bigger fish to fry with another round of government shut down talks, farmers should not count on any changes to Section 179 and Bonus Depreciation for 2014. And if there are changes, it may not be until after the Mid-term elections.
With the reduction of the I.R.C. § 179 to $25,000 and the potential elimination of accelerated first year depreciation, farm business should examine if now is the time to consider such a capital equipment purchase. If you are having a very good year and NEED to upgrade or get new equipment, it may be a good move to do this before the end of the year. Be careful however not the let the tax tail, wag the business dog.
A warning exists. If farmers have been using these measures and have financed their equipment, they may find their tax bill going up since they now have income with no tax depreciation to help offset it and still having to make equipment debt payments. Evaluate your current situation to determine if purchasing depreciable assets is appropriate. Consultation with a tax professional is highly suggested. Don’t buy “new paint” or “new steel” without first doing a comprehensive cost analysis.
To close today’s column, I would like to share a quote I got a chuckle from an unknown author who stated “Did you ever notice that when you put the words “The” and “IRS” together, it spells “THEIRS?”