Use Tax Breaks Toward Farm Equipment, Buildings

50% Depreciation Allowance may expire in 2004, Section 179 in 2005

by Tracy Sayler

It might be a good time to buy farm equipment, put up a grain bin or machine shed, or install drainage tile, as two different federal tax break provisions to help offset some of the costs are set to expire soon.

One is the “bonus” or special 50% depreciation allowance for new equipment and 15 to 20-year assets and land improvements.  A law passed by Congress in 2002 allowed taxpayers who purchased qualified, first-use assets to deduct 30% of their cost in the first year.  A jobs and tax relief law passed by Congress in 2003 broadened this provision, allowing taxpayers to claim a first year deduction of 50% of the cost of qualified assets. This provision will expire on Dec. 31, 2004, unless Congress extends the tax break. The property must be in place and ready for use by the end of the year.

The other tax break is Section 179, included in last year’s jobs and tax relief law. Under this provision, farmers can expense up to $100,000 (indexed for inflation to $102,000 this year) of equipment or farm building purchases in the first year. The current amount of this tax deduction is set to expire at the end of 2005, reduced to $25,000 in 2006.

Most three to seven-year properties will qualify for the S 179 tax deduction, including field drainage tile, wells, farm fencing, single-purpose farm buildings, grain bins, fuel storage facilities, and vehicles with a gross weight of more than 6,000 pounds. Property that qualifies for this deduction must be used for more than 50% business purposes. The amount you can write off under this provision each year is limited to the taxable income from business conducted during that year.

It is possible to claim both the 50% special depreciation allowance and the S 179 expensing deduction on some qualifying purchases.  In fact, a farmer could sell some grain or livestock inventory by the end of the year, purchase qualified property for the same amount, use both tax deductions, and not pay any federal tax on that amount.

Truman Kingsley, a Fargo, N.D. CPA who specializes in farm accounting, gives this example: A farmer planning to install field drain tile at a cost of $300,000 could use the section 179 provision to deduct the first $100,000, and the bonus 50% depreciation on another $100,000, with the remaining $100,000 being depreciated out over the next 15 years. “You could sell $200,000 worth of grain to take advantage of the $200,000 write-off under both tax provisions. You could borrow the remaining $100,000 needed for the $300,000 drain tile expense, and as you pay off the loan, you will have the depreciation to offset the principle payments.”

Kingsley urges farmers to consult with their tax advisors about these and other ways to maximize tax deductions and minimize tax implications. Gifting grain to children as farm wages, for example, or finding ways to minimize family living expenses.

“Every farm has its own unique tax circumstances, but one thing that’s unique to farming in general is that farmers have some tax provisions available to them that other non-farm small businesses don’t,” he says.  “Farmers also have the ability to control what they want to sell, how much, and when.”

It would be beneficial to visit with your tax advisor about tax deduction allowances and possibilities well before the heavy crunch of tax preparation season, when advisors have less time to run over the numbers with their farm clients.  “I have a few farmers come in before bean harvest to see where they’re sitting, and if they need to defer income into the next year.  Then they’ll come in again before the end of the year,” Kingsley says.

The way federal tax rules are implemented will vary by state.  For example in Minnesota, the bonus depreciation is added back to calculate taxable state income.  Gary Hoff of the University of Illinois has detailed backgrounders on the Section 179 expensing and bonus depreciation tax provisions, along with other tax briefs, online at www.farmdoc.uiuc.edu/legal/taxation/articles/index.html .