Senate “Pool” Process to Increase SE Taxes?

The Senate proposals on tax reform contain a new method of computing depreciation as discussed in our last post.  With this new pooling process, it appears that in many cases, farmer’s self-employment taxes will be greater than under current law.

For example, if a farmer purchased a new tractor in 2010 for $300,000 and fully depreciated it using bonus depreciation, this reduced his self-employment income by $300,000.  Now let’s assume he sells it in 2013 for $175,000.  This sale is treated as ordinary income, however, it is not subject to self-employment tax.  He can take the $175,000 of sales proceeds and use it to purchase another piece of farm equipment and fully depreciate it using Section 179 which reduces his SE income by this amount.

Now, with the new Senate tax proposal, the sale of farm equipment does not automatically flow to Form 4797 where it is now reported.  It simply is reflected as a reduction to the pool account and only if you end up with a negative pool amount at the end of the year do you report it on Form 4797.  This means that most farmers will no longer be able to report equipment sales at a gross amount and then use the proceeds to purchase farm equipment to reduce SE taxes.  The sale simply gets homogenized with other farm equipment purchases, thus reducing the farmer’s flexibility in the timing of sales, etc.

Also, the trade-in of farm equipment no longer results in a deferral of gain.  Rather, the trade-in value is shown as if it was sold for this amount and run through the pool.

As stated in our previous post, if you do not like these proposed changes, please let your Senator or Representative know NOW.

Paul Neiffer, CPA