Illinois AgriNews - November 2009
Flexibility of Depreciation Deduction
Gary J. Hoff
Department of Agricultural and Consumer Economics
University of Illinois
Now is the time for farmers to review their income for the year and make plans on how to control their income tax liability. This is typically accomplished by prepaying expenses and either accelerating or delaying crop sales. This is a more difficult process this year because of the weather. Many farmers faced delayed planting due to the wet spring, and the wet fall has prevented many from completing the harvest. Some grain that would usually be stored on the farm is being sold due to high moisture content or quality issues.
Before making prepay decisions, the taxpayer should look at his depreciation options. For 2009 only, most new farm machinery and equipment purchases that would normally be depreciated over seven years are depreciated over five years. This only applies if the taxpayer is the original user of the equipment. If the taxpayer determines this will create more depreciation than necessary, he can elect out of the five-year life, but his only alternative is to depreciate the equipment over a ten-year life using the straight-line method. If electing out, the election applies to all 2009 qualifying purchases.
In 2009, the IRC Section 179 deduction has a maximum of $250,000. If the taxpayer has purchased over $800,000 of qualifying purchases, the $250,000 limitation is reduced dollar for dollar. No expense deduction is allowed if qualifying purchases exceed $1,050,000. In 2010, the limitation is $134,000 of expense on a maximum of $530,000 of purchases. Current law will reduce the Section 179 limit back to $25,000 plus an inflation adjustment in 2011. Taxpayers can choose the asset(s) they want to expense under Section 179. The expensing deduction is also limited to the net profit of the business.
For 2009 only, the taxpayer can also claim 50 percent bonus depreciation. This applies to purchases with a useful life of 20 years or less. The taxpayer must be the first user of the asset. If the taxpayer decides to use 50 percent bonus depreciation, he must use it for all assets within the class. However, he can elect the 50 percent bonus for one class but not for another. For example, the taxpayer may choose the 50 percent bonus for all five-year property, such as trucks with an unloaded gross vehicle weight of 13,000 pounds, but not use it on seven-year property such as farm machinery and equipment.
To illustrate the impact these elections can have, consider a farmer who makes $300,000 of qualifying farm machinery purchases in 2009. Depending on his depreciation and expensing elections, the deduction can range between $15,000 and $278,750.
When making the depreciation decision, the taxpayer should consider the effect the deduction will have on future year’s returns. In option 1 above, the remaining basis of $21,250 will be spread over the next five years. In option 2, the farmer will be entitled to depreciation on $285,000 over the next ten years.