Don’t Trade-in Equipment – Sell it Instead
As a tax advisor, I would normally tell my farm clients to always do a like-kind exchange on their farm equipment. This would normally result in trading-in an older piece of equipment for a newer one of higher value to defer the tax on the old farm equipment.
However, for 2009, there are many cases where this may not be a good idea. The recent tax law extended the Section 179 deduction for equipment to $125,000 for 2009. Therefore, if your total equipment purchases for 2009 will be less than $125,000, I would suggest making sure that non of your equipment that you want to trade in qualifies for the like-kind exchange rules and thus, they will be taxable sales.
Most farmers are probably asking why would we ever want to report a gain-on-sale by selling equipment. The reason is that the gain on sale from selling equipment is not subject to self-employment taxes and the Section 179 deduction on your farm equipment will reduce your self-employment taxes. Thus, reporting gain on sale of equipment can result in a tax savings of about 15% on the sale of your equipment.
As an example, say you have an old combine worth $50,000 that you have depreciated to zero. You want to buy a newer combine for $125,000. If you traded in this combine, you would be able to take section 179 on the net difference of $75,000. This would reduce your taxable and self-employment income by $75,000. However, if you sell the combine for $50,000, you would report a gain of $50,000 which is not subject to self-employment tax and you would be able to deduct the entire combine purchase price of $125,000 which would reduce your self-employment income. The net result is a potential tax savings of about $11,000 under this scenario. This assumes you are not over the taxable wage base.
If you have equipment needs this year, please review them with your tax advisor to make sure you take advantage of these rules if they apply to you.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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