Does 7 Equal 5?

• November 5, 2015
• Paul Neiffer

Senator Roberts (R-KS) and Senator Klobuchar (D-KS) introduced bipartisan legislation last month to allow farmers to depreciate farm equipment over five years instead of the current seven years.  “Changing the depreciation schedule for agricultural equipment to five years would make the tax code more consistent and support rural development by aligning the length of time that farmers can take a depreciation deduction with the average useful life of that property.”

First, I am not sure how changing agricultural equipment to five years makes the tax code more consistent since almost all other business equipment is depreciated over seven years, not five years.  Second, I think most farmers would not buy much farm equipment if the actual useful life of that equipment is only five years.  My father purchased a new Caterpillar D4 tractor in 1963 (on the steep hills of Washington state, normal two-wheel drive tractors would likely tip over).  This tractor was still in use when my father retired in 1984 and I am guessing it is still going strong on a farm somewhere.

For most farmers, Section 179 (at the $500,000 level) is much more important than a five-year life for equipment depreciation.  For new equipment, 50% bonus is next in line and then five or seven-year life would be the last thing that “incentivizes” a farmer to purchase equipment.  I have never had a discussion with a farmer where (s)he is excited that they can depreciate their new tractor over seven or five years.  Rather, they were “excited” they could fully depreciate the tractor using Section 179.

Also, seven-year property is actually depreciated over eight years (half in year one and half in year eight).  Five-year property is depreciated over six years.

As an example, assume a farmer purchases a new tractor for $400,000.  Section 179 would allow a full deduction on this tractor (assuming the deductible amount is at $500,000 and no other equipment purchases during the year).  This results in a total deduction of $400,000 for the year.

If the farmer did not take Section, he could take 50% bonus depreciation of $200,000 and depreciate the rest over 7 years for an additional deduction of about $21,000 for a total first-year deduction of $221,000.

Last, the farmer could take no Section 179 or 50% bonus and assuming a seven-year life the deduction would be about $43,000 and assuming a five-year life the deduction would increase to about $60,000.

The deduction using a five-year life is larger than a seven-year life, but for most farmers, being able to deduct $400,000 is much more important than $43,000 or $60,000.

I am certainly not arguing against a five-year life, I am just stating that I do not believe it will matter to most farmers.

Paul Neiffer, CPA

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