Tax Deduction Deadlines Draw Near
Substantial write-offs for agricultural purchases expire at year’s end
By John Pocock
October, 2011
(Editor’s note: Roger McEowen, the Leonard Dolezal Professor of Agricultural Law at Iowa State University, and Robert Gunther, certified public accountant and tax specialist with Frost PLLC in Little Rock, Ark., will present the latest information on the 2011 and 2012 federal depreciation rules in a TractorLife.com webinar TractorLife.com webinar available on demand now. Click here to watch the webinar. McEowen and Gunther’s colleague, Cheddy Wigginton, were interviewed for this article.)
The overall consensus in the agricultural industry is that farm-related tax laws are going to change significantly in 2012, says Cheddy Wigginton, certified public accountant, FROST PLLC, Little Rock, Ark. How drastic those changes will be is still unknown, he adds.
“Rather than speculate on the unknown, it’s important to deal with the known,” says Wigginton. “What’s known is that there is 100% bonus depreciation for new farm machinery purchases this year and only 50% bonus depreciation next year. There’s also a $500,000 Section 179 deduction for new or used farm machinery purchases that will drop to $125,000 in 2012 without further legislation. However, you must have taxable farm income to qualify for a Section 179 deduction.”
Farmers should keep in mind that their income as shown on an IRS Form W-2 from an off-farm job can also count as income for purposes of a Section 179 deduction, and a spouse’s W-2 wage income is considered income from an active trade or business for this purpose, if the couple files a joint return, notes Roger McEowen, director, Iowa State University Center for Agricultural Law and Taxation. He also points out that the 100% bonus depreciation can apply to more than just farm machinery.
“Bonus depreciation applies to new farm property having a recovery period of 20 years or less,” says McEowen. “Farm buildings are depreciable over a 20-year life, and so they are also eligible for bonus depreciation. However, for newly constructed farm buildings on which bonus depreciation is claimed, the buildings must be used exclusively for farm purposes. Mixing farm and non-farm uses of the building may disqualify the building for bonus depreciation.”
With bonus depreciation, farmers could also create a taxable loss that can apply to prior tax years, says Wigginton. However, “for farmers that accept a federal subsidy, there’s a $300,000 limit on the loss that they can carry back to the previous year’s taxes,” he says.
Farmers can also claim bonus depreciation on one type of asset, such as a combine, and elect not to claim bonus depreciation on a different class of assets, such as a farm building, says McEowen. “This technique may allow a farmer to optimize the use of bonus depreciation so that a large net operating loss is not shown on the return,” he says.
Also, farmers can elect to use or revoke the expense method depreciation on an amended return for any “open” tax year that begins before 2012, notes McEowen. “That depreciation election allows for a great deal of flexibility in tax planning on an ‘after-the-fact’ basis,” he says. “In addition, leased property is eligible to be expensed if the property is leased under a short-term lease and there are significant non-rental expenses in the business.”
Although there’s “a tremendous incentive to buy machinery now” in order to qualify for this year’s generous farm machinery purchase tax deductions, Wigginton cautions farmers to check with their tax consultant before buying. “Even if you’re careful to get your federal tax incurrence down with these deductions, the state taxes could still be substantial,” he says. “So, consult your tax advisor for the state tax law implications of taking these federal tax deductions.”
Some states fail to accept federal bonus depreciation allowances entirely, notes Wigginton. “In Arkansas, for example, farmers will still need to depreciate their new farm machinery purchases over 7 years when filing their 2011 state tax return,” he says. “In states like Arkansas, it may be helpful for farmers to pay the estimated state tax on these federal farm machinery tax deductions by Dec. 31st, 2011, so that they can deduct those payments on their 2011 tax return. Otherwise, farmers will have to wait until April 2013 to deduct those payments on their 2012 tax return.”
In other states, there might be zero benefit in paying state taxes early for an alternative minimum tax, adds Wigginton. “So, make sure your tax consultant knows the state tax laws that relate to these deductions.”
Farmers who want to take advantage of 2011 machinery purchase tax incentives should also check with local equipment dealers on the inventory of the machinery that they want to buy, says Vernon Schmidt, executive vice president of the Farm Equipment Manufacturers Association (FEMA). “There is a growing concern regarding equipment availability,” says Schmidt. “I’ve talked with several manufacturer representatives in the last couple months who are having problems increasing production beyond what had been scheduled. Lead time with some component suppliers is keeping some equipment, which had not been planned, from being manufactured.”
