What is in this article?:
- New tax law extends incentives for machinery, equipment purchases
- Factors to consider
- Farmers, ranchers and small-business operators can elect to take additional deductions in the first year for machinery and equipment purchases in 2011.
- 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.
Factors to consider
When comparing the Section 179 expensing option and bonus depreciation, Nelson said several factors should be considered when deciding whether or not to elect one of these options.
For example, the timing of the purchases will affect the amount of the tax benefit available. Property purchased in 2011 is eligible for 100 percent bonus depreciation, but for property purchased in 2012 it will be 50 percent.
“The maximum deduction for Section 179 expense is $500,000 in 2011 and $125,000 in 2012,” Nelson said.
The overall level of income expected for the year may also affect the option choice.
“The amount of the Section 179 deduction cannot exceed the taxable income from the taxpayer’s trades and businesses. Any excess deduction above the trade or business taxable income can be carried over and deducted in the next year subject to certain Section 179 limits.”
On the other hand, Nelson added, first-year bonus depreciation can be deducted in a low-income year creating a net operating loss, which can be carried back to previous tax years or carried forward.
The type of property you acquire also affects which option can be used. For example, a machinery shed or general purpose farm building (tangible property with a MACRS depreciable life of 20 years or less and that meets certain requirements) would be eligible for bonus depreciation, but not for Section 179 expensing.
Only property purchased new is eligible for the first-year bonus depreciation, while either new or used property is eligible for Section 179 expensing.
“Remember, these depreciation options do not increase the total amount of the deductions over time,” Nelson cautioned. “They simply accelerate the cost recovery, moving the deductions to an earlier year and leaving smaller deductions in later years.”
Therefore, he noted, they likely will be more advantageous in years when net income is expected to be higher than normal.
For a complete overview of the tax law changes, visit http://agecoext.tamu.edu/resources/library/federal-income-taxes-recent-references.html.