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Depreciation and Expensing Options -An Update

George F. Patrick, Professor

 

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010) is the latest in a series of laws affecting the depreciation and expensing options available to businesses. The intent of these changes is to increase the incentive for businesses to invest and to stimulate the economy. This article reviews changes in depreciation and Section 179 expensing options for recent years and options currently available for 2011 and 2012. This discussion emphasizes changes affecting agricultural producers and farm businesses.


Depreciation and Section 179 Expensing


Producers and landowners can generally recover the cost of assets which last more than a year through depreciation. Depreciable assets are placed in classes reflecting their useful life under the Modified Accelerated Cost Recovery System (MACRS). For assets used in a farming business, the 150-percent declining-balance method with a shift, later in life, to straight-line depreciation maximizes the depreciation deduction. 

Section179 allows the deduction of some or all of the cost of qualifying assets purchased for use in the active conduct of a trade or business. 

To qualify for Section 179, the property generally must be tangible personal property.   
Farm machinery and equipment; livestock used for draft, breeding, or dairy purposes; grain storage; single purpose livestock and horticultural structures; and field tile all qualify for Section 179 expensing. The property must be purchased, but new or used can be expensed.   Only the boot portion paid in a like-kind exchange (swap or trade). The Section 179 expensing election is phased out if more the specified amount of qualifying investment exceeds a specified level. The Section 179 deduction is limited to the taxable income from any active trade or business before Section 179 expensing. 

  
Additional First-Year or Bonus Depreciation


The Economic Stimulus Act of 2008 provided for a “bonus” or additional first-year depreciation (AFYD) deduction equal to 50 percent of the adjusted basis of qualifying property placed in service after December 31, 2007 and before January 1, 2009. The 50 percent AFYD deduction was extended to qualified property placed in service before January 1, 2011. The Tax Relief Act of 2010 increased the first-year tax write-off to 100 percent for qualifying property placed in service after September 8, 2010 and before January 1, 2012. For property placed in service after December 31, 2011 and before January 1, 2013, the bonus depreciation or AFYD is currently scheduled to revert to 50 percent. 

Property qualifying for AFYD must be new property with a MACRS recovery period of 20 years or less. Thus, agricultural machinery and equipment; work, breeding, and dairy livestock; single-purpose agricultural and horticultural structures; field tile; and general purpose farm buildings, like machinery sheds, would be eligible. For qualifying assets acquired in a like-kind exchange, the entire basis (adjusted basis of the trade-in plus additional resources contributed) is eligible for AFYD.  Land owners making qualified investments, such as field tile, appear eligible for the AFYD but not Section 179 expensing. 

Limitations

The Economic Stimulus Act of 2008 also increased the maximum Sec. 179 deduction from $125,000 in 2007 to $250,000 in 2008. The 2007 Sec. 179 deduction is phased out if qualified investment exceeds $500,000. This investment threshold phase-out limit was increased to $800,000 in 2008. The Small Business Job Creation Act of 2010 further increased the maximum Sec. 179 deduction and investment limit to $500,000 and $2,000,000, respectively for tax years 2010 and 2011. For tax years beginning in 2012, the maximum Sec. 179 deduction will be $125,000 and the phase-out investment amount will be $500,000 (with indexing). The year-by-year limits are summarized in Figure 1. 

figure 1

 

Some Planning Considerations1


Some new assets, such as machinery sheds, shops, and general purpose buildings, are eligible for AFYD, but not Section 179 expensing. The entire basis of trade-in is eligible for AFYD, but only the boot portion is eligible for Section 179 expensing. AFYD is taken after Section 179 expensing, if any. AFYD treats all qualifying assets in a MACRS class acquired during the tax year must be treated the same. In contrast, a producer can pick and choose with respect to how specific assets are treated for Section 179 expensing. The total acquisition of qualifying property may limit the amount of the Section 179 election. The allowable Section 179 deduction may be limited by taxable income from an active trade or business. 

Both Section 179 expensing and AFYD involve an acceleration of the cost recovery on selected assets. As noted previously, there are differences between methods and qualifying assets Decisions can be made after the close of the tax year. Because of the retroactive nature of the 100 percent write-off to September 8, 2010, producers may want to reevaluate their tax planning.  
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1For a more in-depth discussion of Sec. 179 and AFYD see George Patrick, “Farmers’ Cost Recovery Alternatives for 2008.”  Purdue Agricultural Economics Report, Nov. 2008, p. 7-10. Online at: http://www.agecon.purdue.edu/extension/pubs/paer/2008/November/PAER0811.pdf

 

 


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