Good News On Partnership Purchases
The IRS just released Proposed Regulations regarding 100% bonus depreciation. As most everyone knows, farmers can now deduct 100% of any fixed asset purchase subject to depreciation in the year that it is placed in service. It does not matter if the asset is new (the rule under the old law) or used (the new law).
However, what about a transaction between partners and/or the partnership. For example, assume two brothers are in a 50/50 partnership and own a combine worth $300,000 that has been fully depreciated. They find another farmer who would like to acquire a one-third interest in the partnership and will pay $100,000 for that interest.
Under the new law the farmer could take 100% bonus depreciation if he bought the combine for $100,000 or an undivided interest in a combine (no partnership). The new Proposed Regulation says essentially the same. The new partner will be able to take 100% bonus depreciation on the $100,000 investment (assuming the partnership has a valid Section 754 election). The partner could also elect out of bonus depreciation (which can be separate from the partnership election).
The Proposed Regulations also indicate that it does not have to be a new partner. It can be a current partner getting an additional interest from a current partner. However, care must be taken that the purchase is not from a related party. In this situation, related parties consist of ancestors and descendants. Brothers and sisters do not count. Suppose, the combine partnership is comprised of three brothers each owning $100,000 of the partnership. One brother buys the other brother’s interest. He can fully deduct the $100,000 purchase. If he bought it from his dad, he could not take bonus depreciation or Section 179, but could depreciate the “combine” over seven years (since it is used the life is 7 not 5 years).
Many farm operations operate as partnerships. Under the new law, transactions between partners can create a deduction that can be fully deducted in one year instead of up to 20 years. However, the partner selling will still owe tax on the sale.
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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