Late Options On Bonus Depreciation Are Available
In a recent Private Letter Ruling, the IRS allowed a large corporation to change their election related to bonus depreciation. Bonus depreciation allows farmers to deduct some upfront percentage of their fixed asset purchases that are new during the year. The current percentage if 50% (it has been as high as 100% during parts of 2010 and all of 2011). This can be a very powerful tax planning tool, however, in many situations, farmers would rather not take bonus depreciation. Let’s look at an example:
Farmer Sue purchases is a sole proprietor and purchases a new JD S680 for $500,000 in 2017. Her net farm income for the year is $50,000 before taking into account bonus depreciation. If she deducted the full bonus plus regular depreciation she would have a loss of about $250,000. Instead, she makes an election to not take bonus depreciation and her farm income ends up close to zero for the year. If she had not made the election, it is likely that her self-employment income in future years would be much higher due to bonus only creating an net operating loss that can’t be offset against farm SE income.
There are other situations where it may not make sense to take bonus depreciation. In order to do this, the farmer must make an election on the tax return. This election can only be revoked in writing to the IRS. The recent Private Letter Ruling showed one example of this being allowed. There are multiple other examples. However, in order to get a written ruling from the IRS, the cost can easily approach $25,000 or more between the IRS fee and the cost to prepare the request.
Therefore, make sure to fully review with your tax advisor your bonus depreciation decisions. Doing it wrong can cost you.