In 2010, two new tax bills gave farmers healthy incentives for buying machinery and equipment to help boost their operations’ efficiency and stimulate the rural economy. The Small Business Jobs Act of 2010 increased Section 179 tax deductions for either new or used farm machinery from $250,000 to $500,000 for both the 2010 and 2011 tax years. The 2010 Tax Relief/Job Creation Act created a 100% bonus depreciation allowance for new farm assets purchased after September 8, 2010, and before January 1, 2012.
Data from the Association of Equipment Manufacturers (AEM) show these new tax incentives are working to increase farm machinery retail sales. “Farm tractors and combines are the big sellers right now,” says Charlie O’Brien, AEM’s vice president of agricultural services. “From the end of May 2010 through end of May 2011, sales are up nearly 25% for 4-wd farm tractors and nearly 15% for self-propelled combines.”
In addition to recent tax deduction incentives, a healthy farm economy also is encouraging an escalation in farm equipment sales, O’Brien notes. “The economics of depreciation law, high commodity prices, higher net farm incomes and lower farm debt are all contributing factors driving key activity in the number of farm machines being sold and upgraded,” he says. “Clearly, there is also a huge benefit to those farmers who are considering a machinery purchase, if they can act soon in order to qualify for the deductions that are available.”
Still, Congress may or may not decide to extend the new, tax write-off incentives for farm equipment and machinery purchases beyond 2011, O’Brien points out. “In the Senate, there are already sponsors of a bill that would keep depreciation on farm machinery at current levels,” he says. “However, we all know the budget process is a difficult one today. So I think it will certainly be a fight to extend these depreciation levels beyond this year, as budget deficits continue to increase.”
Farmers like Scott McPheeters, Gothenburg, NE, say it would be a shame if Congress failed to extend the new farm machinery tax deduction write-offs beyond 2011. “Unequivocally, yes, it will negatively impact farm machinery sales if the new bonus and Section 179 tax deduction levels expire,” he says. “I think these are some of the best stimulus programs around; they really do incentivize people to go out and invest in new equipment.
“Speaking for myself, I’d much rather do the Section 179 deduction and depreciate equipment as I buy it, rather than depreciating it over long periods,” McPheeters adds. “For me, it’s really hard to look two to three years ahead of time to plan my machinery equipment needs and what my tax situation might look like that far down the road.”
Machinery tax write-offs like those that passed in 2010 are good tools that are well worth extending to future years, agrees Paul Gervais, who farms near Tracy, MN. “If the farm economy stays like it is, I’m sure a lot of people are going to be using them,” he says. “They are tools that really do stimulate the economy, and that’s what lawmakers want right now.”
Still, Gervais has reservations about buying new equipment this year solely to qualify for a generous tax write-off next April. “I have used accelerated depreciation tax write-offs before, but I try to be careful about it,” he says. “Before I decide to use it this year, I first I need to see what my income is going to look like at the end of the year.”
Accelerated depreciation tax write-offs do have potential drawbacks, Gervais points out. “You could write off huge amounts of money, but it might result in cash flow problems later if you have to finance the purchase and have a bad year afterwards,” he says. “Just remember that you can’t use that deduction more than once, even if you keep paying for the equipment over multiple years, and it could also hurt you from a tax standpoint if the equipment depreciates to zero and then you sell it for a gain.”
Assests must be used this year
Another challenge for many famers is being able to ensure that they can take possession of the new machinery before the tax laws expire. “You’re supposed to have physical possession of the equipment before you can utilize the deduction,” Gervais says. “If you’re putting up a building, it’s supposed to be usable by the deadline, or you can’t write it off.”
Rob Holcomb, a University of Minnesota agricultural business management extension educator, concurs. “The tax code is pretty clear that the new assets [machinery or buildings] must be placed in service before the expiration date of the deduction occurs,” he explains. “So, in this case, if you buy a combine, the asset should be in your possession before January 1, 2012. For a shed, it has to be usable by that date. Just because checks have been written for the item that you’re buying isn’t good enough; it has to be present on your farm by that date.”
Farmers who are considering buying machinery or putting up a building to receive a federal tax write-off should also remember that most states don’t recognize the full deduction allowed at the federal level. “For example, Minnesota will only allow a 100% deduction on the first $25,000 of a Section 179 deduction,” Holcomb says. “Any amount exceeding the $25,000 level must be spread over a five-year period. With the bonus depreciation, all bonus depreciation must be spread over a five-year period on the state of Minnesota return.”
Farmers should always check with their tax professional to see how any tax law changes might impact their bottom line, Holcomb says. He adds that farmers should also exercise caution when purchasing machinery that won’t be delivered by the end of the business year.
“There’s no way of knowing, especially in this political climate, if Congress will decide to extend those depreciation levels into future years,” Holcomb says. “Under current legislation, the $500,000 Section 179 deduction is scheduled to expire at the end of 2011. Prior to current legislation, the 2011 Section 179 amounts were scheduled to fall to $25,000. The 100% bonus depreciation reverts back to 50% bonus depreciation in 2012. The 50% bonus depreciation completely expires at the end of 2012.”