Pooling is Back!
Senator Backus a few years ago proposed replacing the current tax depreciation system with a pooling system. Under that system, personal property purchases and sales would be “pooled” together and the net remaining number would be multiplied by a percentage for that year to arrive at your net depreciation deduction. If the net number was negative due to sales exceeding net purchases and carryover basis, the negative would be reported as ordinary gain.
Yesterday, Senator Wyden (D-Oregon) issued a draft report on updating Senator Backus proposal. Senator’s Wyden’s proposal would be revenue neutral while the other proposal was designed to raise revenue to allow a reduction in the top corporate tax rate. Here are some of the important provisions in the draft:
MACRS and ADS depreciation would be eliminated and replaced with 6 pools for personal property assets. The current Asset Class Assignment and the Proposed Pool % Deduction is as follows:
Although the current rules for personal property like-kind exchanges would be eliminated, the new proposal actually results in an automatic like-kind exchange and no longer requires property to be of like-kind. Under the old rules, if a farmer sold farm machinery he had to replace it with farm machinery. Under the new proposal, if a farmer sold farm machinery that is in pool #3, he is only required to purchase other equipment in pool #3 to “defer” the gain. The sale is netted against any purchases in that pool and any remaining balance is then multiplied by 25% to arrive at final depreciation expense for the year (for that pool).
One negative from this change is that self-employment tax may be higher since the gain from selling the equipment is not separately reported on Form 4797 and then full deduction for new equipment by using Section 179 on Schedule F.
The half-year and mid-year conventions are eliminated. Under current law, you are penalized if you purchase too much equipment in the last quarter of the tax year. Under the new proposal, it does not matter when you purchase the equipment.
Mixed-use property (partially business and partially personal) and vehicles under current law have multiple rules. The new proposal appears to simply these rules and make it easier to comply.
Current rules for Section 179 and bonus depreciation appear to remain as is, but as with any proposal, changes will occur and it does not mean that this will happen. All-in-all, the proposals appears fairly reasonable and may simplify farmer’s tax lives, but we will have to wait and see.
Paul Neiffer, CPA
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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