Will Section 179 Be Needed Under Tax Reform
Under current law, Section 179 allows farmers to expense up to $500,000 of equipment and other related purchases each year. This amount has now been made permanent and indexed to inflation and for 2017, the amount allowed increases to $510,000. This amount is phased-out dollar-for-dollar when your total purchases exceed $2 million (indexed to inflation).
Most farmers tend to take advantage of this deduction each year to reduce their income taxes. Under some of the current tax reform proposals, this deduction may no longer be needed. Several of the provisions call for immediate expensing of “ALL” purchases (other than land) by farmers. This means that a farmer who buys equipment, breeding livestock or buildings will be allowed to expense 100% of the purchase.
As an example, assume Farmer Jones operates a dairy in Wisconsin. He purchases $700,000 of equipment, builds a new dairy parlor for $1 million and purchases new breeding stock of $1 million. Under current law since his total purchases exceed $2.5 million (indexed to inflation), he cannot deduct any of these costs under Section 179. He can take 50% bonus depreciation on the equipment and buildings (if all new) and may be able to take it on the breeding stock. However, if tax reform adds the 100% deduction provision, all $2.7 million of these purchases will be allowed in full.
However, this may not be all good news. Under current law, breeding stock (if held more than two years) qualifies for capital gains treatment. If the 100% deduction goes into effect, it is likely that these sales will now be subject to ordinary income tax rates. Although these rates may be lower than current law, they will still be higher than capital gains rates under tax reform.
In our example, if the farmer held his breeding stock for more than two years and sold it for $2 million, $1 million of the gain would ordinary income and $1 million would be capital gains (assuming the breeding stock was fully depreciated when sold). The farmer would have preferred to depreciate these assets and get capital gains treatment on the sale, but under tax reform, this may no longer be allowed.
As with any new tax law, the final result may not quite end up as good as everyone wishes. We will keep you posted.
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.
hmmm — if expensing of all fixed assets (excluding land) in fact becomes part of the IRC — there goes “normal” depreciation — I would assume depreciation will then become an election? Interesting ……