New tax law extends incentives for machinery, equipment purchases

Farmers, ranchers and small-business operators can elect to take additional deductions in the first year for machinery and equipment purchases in 2011. These elections were extended under the recent tax law changes, according to Texas AgriLife Extension Service economists.

With rising commodity prices and some rain, many farmers and ranchers will likely see a boost in gross income for 2011. Some will be looking to replace aging machinery or purchase new equipment for their operations, the economists said.

“Before finalizing any purchase deals, however, be sure you understand the tax options available,” said Jose Pena, AgriLife Extension economist in Uvalde. “As always, it’s a good idea to consult with your tax advisor to see how this will impact your financial situation before making a decision.”

Dr. Gene Nelson, an economist specializing in financial management in the department of agricultural economics at Texas A&M University, said when depreciating equipment two types of deductions are available – the Section 179 expensing election and first-year bonus depreciation.

“These two options have different characteristics and apply to some different situations,” Nelson said. “But in some cases, the two elections can be combined. The bonus depreciation can be claimed after any Section 179 expense deduction and before figuring the regular depreciation.”

Nelson said when depreciating the costs of machinery, equipment or structures, farmers should be aware of these differences between the two options:

• Section 179 expensing election: Businesses have the option of taking an immediate deduction of up to $500,000 of the cost of tangible property purchased in 2011 in lieu of depreciation. The purchased property may be new or used. But in the case of a trade-in (like-kind exchange) only the “boot” paid is eligible for expensing.
• Bonus depreciation: Under the 2010 Tax Relief Act, first-year depreciation options are expanded by allowing businesses a depreciation deduction of up to 100 percent of the cost of qualified new (not used) property acquired and placed in service from Sept. 9, 2010 through Dec. 31, 2011.