New Tax Bill Includes Farm-Specific Provisions

Deduct Drainage Tile, Equipment

By Gary Hachfeld, regional extension educator, and Bob Anderson, extension educator, farm management, University of Minnesota

In May 27, 2003, President Bush signed a significant tax cut into law, officially known as the Jobs and Growth Tax Relief Reconciliation Act of 2003. The bill includes tax reductions of $320 million, plus some aid to states and increased child tax credits, putting the total cost at $350 million. Most of the bill provides tax relief for individual taxpayers, such as the $400 increase per child tax credit and downward adjustments to tax rates. However, there are some provisions specifically targeted to business that will be advantageous to farmers and ranchers.

The Section 179 expensing deduction for first year depreciation increases to $100,000, beginning Jan. 1, 2003, up from $25,000 in 2002. The new provision means that taxpayers can expense up to $100,000 of equipment purchases in the first year. Drainage tile and single-purpose farm buildings, like hog barns and dairy barns, in addition to equipment, qualify for this option.

Also, in the past the Section 179 deduction began to phase out if you bought and placed into service more than $200,000 of qualifying property in one year. That threshold has been moved up to $400,000.  The write-off is then reduced dollar for dollar for total property placed in service if the threshold is exceeded. Thus, the write-off will phase out completely if purchases are $500,000 or more.

This higher Section 179 limit lasts through 2005.  Vehicles with a gross vehicle weight of 6,000 pounds or more still qualify for the deduction; light trucks and smaller cars still do not.

The “bonus” depreciation on new equipment goes from 30% to 50%. The Job Creation and Worker Assistance Act of 2002 first created this allowance. It was set to expire on Sept. 11, 2004, but the new act extends the bonus until Dec. 31, 2004. The 50% bonus is for new equipment only. However, machine sheds and other multi-purpose buildings that do not qualify for the Section 179 deduction do qualify for this allowance. Property purchased and placed in service after May 5, 2003 qualifies for the 50% allowance; property purchased prior to May 6, 2003, still qualifies for the 30% allowance. Purchases with a binding contract written prior to May 6, 2003, qualify for the 30% bonus only, even if they are placed in service after May 5.

Tax rates on dividends from stocks and mutual funds, not patronage dividends, will be reduced to 15% maximum, as will long-term capital gains rates. For taxpayers in the 10% or 15% tax brackets, rates on dividends and long term capital gains will be reduced to 5%. These rates take effect Jan 1, 2003, and remain in effect through 2007. Any dividends paid from a C corporation, including closely held corporations, will qualify for the new rates. The tax rate on capital gains attributable to building depreciation has not changed; the maximum rate remains at 25%. Short-term capital gains will still be taxed at ordinary tax rates.

Alternative minimum tax exemptions have been increased under the new act. For 2003 and 2004, the exemption has been increased $9,000 to $58,000 for married taxpayers filing jointly, and $4500 to $40,250 for single filers. The exemptions will revert back to the present amounts after 2004, unless Congress takes further action.