Like in the last few years and with a few minor tweaks, the Internal Revenue Service (IRS) is offering a tax deduction for big-ticket farm purchases in 2021.
The IRS tax code Section 179 deduction is a way to reduce the total cost of new equipment and machinery by enabling the buyer to claim full depreciation in year one. Normally, that depreciation (referred to as “bonus depreciation by the IRS) would be parceled out annually over the time the purchase is financed. You should consult with your personal Tax Advisor for guidance on Section 179.
According to the IRS, Section 179 deduction was expanded in 2018 to cover both used and new qualifying equipment. In 2021, you can claim under Section 179 up to $1,050,000 of the price of purchases up to $2,620,000.
Farm equipment tax write off
Under Section 179, you can choose which purchases to cover and which you would like to save as future tax breaks. Some farmers and ranchers choose to split the Section 179 deduction for individual purchases in their year-over-year tax planning. You should consult with your personal Tax Advisor for guidance on Section 179.
“In years past, when your business bought qualifying equipment, it typically wrote it off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off $10,000 a year for five years,” according to Section179.org, a hub of information on the deduction. “Now, while it’s true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it. And that’s exactly what Section 179 does — it allows your business to write off the entire purchase price of qualifying equipment for the current tax year.”
Who and what farm equipment qualifies for a Section 179 deduction
According to the IRS, anyone buying, financing or leasing new or used equipment for the 2021 tax year will qualify for a Section 179 deduction, provided the total amount is less than $3,670,000 (the deduction itself plus the price of eligible purchases). For farmers, that typically means equipment, machinery, tools and software purchased between January 1 and December 31, 2021.
How much can I save?
On equipment purchases of $1.15 million, for example, the first-year write-off is typically $1.05 million, with a bonus first-year depreciation of $100,000. After Section 179 and bonus deprecation are claimed, straight-line depreciation may kick in after the effectiveness of the two prior forms of depreciation are utilized. Straight-line depreciation allows equipment purchased to be depreciated at a rate spread over the remaining years of its expected salvage value. For a piece of equipment with a useful life five years, that means the total value declines by 20% each year. To leverage a Section 179 deduction in a case like this example, the first step is to consult with your personal tax advisor.
Section 179 considerations
While the tax incentives under Section 179 are appealing to drive down income, farmers and ranchers should avoid depending only on this Code section. “Section 179 is certainly a powerful tool for farmers, but it also comes with some items to watch out for. If you sell the asset you took a 179 deduction on prior to the end of its’ useful life you will be subject to recapture rules. Additionally, if you are planning to transition your operation to the next generation you may be building up a tax wall that may hinder your ability to effectively and efficiently transition those assets how you desire.” Ryan Patton, JD, MBA with Nationwide’s Advanced Consulting Group.
How can I learn more?
You and your tax professional can reference Section179.org for information you need to make the most of the Section 179 deduction and bonus depreciation before the end of the year. Find additional ideas to protect and strengthen your operation at AgInsightCenter.com.