Warning – Farmer’s Tax Guide is Misleading
With all of the changes due to the new tax law, it is expected that even the IRS may get some of the changes wrong when communicating the new information to taxpayers.
Many farmers and tax practitioners rely on IRS Publication 225 – The Farmers Tax Guide to help them prepare their income tax returns. We have now noticed that the information in their “What’s New for 2018” for depreciation is wrong.
In this section on page 36 in the second paragraph regarding “depreciation of certain farm property” the IRS states that the recovery period for “any equipment or machinery…. used in a farming business” has a changed from 7 to 5 years.
This is correct for new equipment, however, used equipment remains with a recovery period of seven years. Code Section 168(e)(3)(B)(vii) was originally put into place back in 2008 during the recession to allow a five year recovery period for new farm equipment for only calendar year 2009 (technical term “original use with the taxpayer”). This was designed as an incentive for farmers to purchase new equipment to help the economy.
The TCJA simply updated the code to reflect that the five year recovery period would now apply for new farm equipment and machinery put in service after December 31, 2017.
Based on the IRS wording, almost all taxpayers will automatically assume that all new AND used farm equipment and machinery is now 5 years.
On page 44 of the Farmer’s Tax Guide, the IRS provides a table with most of the recovery lives. It indicates that farm machinery and equipment is 5 years, with a footnote simply repeating the pertinent code wording under Section 168(e)(3)(B)(vii). We doubt very many farmers or tax practitioners will ever read that footnote or even if they do read will understand it.
Now with 100% bonus depreciation and Section 179 it may not matter too much, but we should be make sure to prepare tax returns correctly and understand the rules.
We also hear that there may be some seminars repeating the incorrect IRS information.
On a personal note, my wife forced me to post this photo of me doing this post with my new granddaughter – Madison Grace Neiffer. I must admit she is very cute (she looks nothing like her grandfather).
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.
Farmers Tax Guide also states that only CASH paid on equipment purchased is eligible for Sect. 179. Page 40 states “If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid.” I thought this changed for 2018 since 1031 exchanges are no longer allowed for equipment.