Direct expensing for farm taxes
Warren Schauer, Michigan State University Extension
| Updated: November 15, 2011
First-year Direct Expensing (Section 179) is an
election in IRS code that allows businesses like farms to deduct the cost of
capital purchases as a tax deductible expense. In 2011 up to $500,000 of
personal property capital purchases may be direct expensed if placed in service
by the end of the year.
In most cases the capital purchases that qualify are
personal property used more than 50% of the time in the business. The property
may be new or used. Examples of eligible property include farm machinery,
breeding livestock, grain bins and other single purpose agriculture or
horticultural structures. In addition, off-the-shelf computer software is
currently eligible property. Single purpose structures do not include farm
shops or general purpose farm buildings.
There are several limitations that apply for direct
expensing. If the farm business purchases and places into service over $2
million dollars’ worth of qualifying property then the $500,000 limit is
reduced dollar for dollar. For example if a farm buys $2,125,000 worth of
equipment then the amount of First-year Direct Expensing (Section 179) allowed
is limited to $375,000. If the business purchases $2,500,000 or more in 2011
then no direct expensing is allowed.
The amount is also limited to the combined taxable
income before the deduction derived from the active conduct of all trades or
businesses. Section 1231 gains and losses reported on form 4797, such as sales
of breeding livestock and machinery are taxable income as well as wages. For
example, if a farm bought $300,000 of farm machinery and the net farm income is
$125,000 the first-year direct expensing is limited to $125,000. The amount
disallowed by this business taxable income limitation can be carried forward
against future capital purchases.
Also keep in mind in any year that the asset ceases
to be used more than 50% in the active conduct of a trade or business, a
portion of the expensed amount is recaptured.
The determination of whether the mid-quarter
convention applies due to purchases made in the fourth quarter of the tax year
is made after any direct expense deduction and reduction of depreciable basis
for credits.
The carryover basis from traded-in property is not
eligible for direct expensing, only the extra or boot can be direct expensed.
Boot is the cash and/or loans that are used to purchase the asset in addition to
the value of the equipment traded for another piece of equipment. If a farmer
traded in an old tractor for a new tractor, only the amount paid to dealer
beyond the value of the trade-in would qualify for direct expensing. In
addition, large SUVs more than 6,000 pounds Gross Vehicle Weight Rating or not
more than 14,000 pounds are limited to $25,000 in direct expensing. A business
can direct expense a portion of an item and then use regular deprecation on the
remaining amount.
Of course, if the taxpayer direct expenses 100% of
an item then there is no more depreciation left to expense in future years on
that piece even if it still is in use.
For tax years beginning in 2012, maximum direct
expensing is $125,000 indexed for inflation with phase out starting at $500,000
of qualified property placed in service. In 2013 maximum is $25,000 with phase
out starting at $200,000. It is possible that Congress could increase this
amount prior to 2013.
Remember it is always a good idea to review any
elections with your tax advisor.
This article was published on MSU Extension News for Agriculture. For
more information from MSU Extension,
visit http://news.msue.msu.edu.
