100% Bonus Depreciation – No Income Limitation!

We had a reader send in the following question:

“I read a post from you a week ago or so about 100% bonus depreciation on farm buildings. Looking at putting up a machinery shop will I be able to deduct all of the cost my 2011 taxes if I put the building up this year and have the income to cover it.”

Farmers sometimes get Section 179 and bonus depreciation rules mixed up.  Section 179 has an overall income limitation that applies to the actual deduction that might be allowed.  For example, if the farm generates $200,000 of net income before the allowable Section 179 deduction (including depreciation on all other assets), then the total amount of allowed Section 179 deduction for the year is $200,000.  This is true if the asset placed in service costs $500,000.  Remember that farm buildings are not available for the Section 179 deduction.

Now, in the case of bonus deprecation, as long as the building is a NEW building, the income limitation do not apply.  Let’s take the case of the farm building costing $500,000 with net farm income after all other costs of $200,000.   In this case, the farmer is allowed to take a full bonus depreciation deduction of $500,000 and show a $300,000 farm loss.  If the farmer has no other income, they can carry the loss back two years to offset income in 2008 and 2009 and forward to 2011 and beyond until they use it up.

Remember on all new equipment, farm structures and farm buildings placed in service in 2011, the farmer can deduct 100% of the cost without worrying about the overall income of the farm operation.  Also, make sure to review this with your tax advisor to determine if your structure is set up properly to allow the full deduction.  If you are an S corporation and this bonus depreciation creates a loss greater than your available basis, you will not be allowed to deduct the full amount of bonus depreciation this year.