If it's true that all good things must come to an end and what the government giveth, the government can also taketh away, then producers who haven't yet looked into the advantages of the Section 179 tax deductions need to act quickly. Those deductions, while they don't go away, will be scaled back for 2012.
Section 179 is a provision in the Internal Revenue Code that allows a business to expense items that otherwise would be capitalized and subject to depreciation, says Bob Haag, with the accounting firm Wilson, Haag and Co. in Amarillo, TX. "It's been reworked many times and has had various temporary provisions," he says.
For 2011, the limit was raised to $500,000. That means a business can take a one-time deduction for the full purchase price, up to $500,000, on equipment leased or purchased and put into service this year, up to a total of $2 million spent on equipment. For 2012, that deduction will drop to $125,000.
Almost all types of equipment, both used and new, qualify for the deduction, as long as the equipment is purchased for the trade or business that you're in, Haag says. In other words, if you're a rancher but also own rental property in town, the deduction only applies to equipment, such as machinery, computers, software, office furniture, vehicles and other tangible goods, purchased for the ranch. The deduction doesn't apply to real estate.
In addition, businesses can take the bonus depreciation, which Haag says is more beneficial than the Section 179 deduction in some instances. The provision applies to new equipment purchases only, but the $2 million cap doesn't apply. For feedyards, farmers and others who may have invested in heavy machinery, the bonus depreciation provision can be helpful.
Here's how it works: Say you purchased or financed $650,000 in equipment, either new or used but new to you, this year. Under the Section 179 provision, you can deduct $500,000 in 2011. If any of that equipment was new, you can deduct the additional $150,000 under the bonus depreciation provision. Assuming a 35% tax rate, that gives you a $227,500 write-off on your 2011 taxes, and a $422,500 net cost in the equipment.
For cattlemen who had to liquidate cows due to drought, flooding or other reasons, being able to take that deduction in 2011 may be important.
"Selling off cattle will often generate taxable income because the cows are usually fully depreciated and their calves have no tax basis at all," says Ken Williams, CPA and managing director of Williams, Jarrett, Smith & Co., Tulsa, OK. "Farmers can minimize their taxes while maximizing economic gains through properly timed and structured expenditures."
As always, there are limitations. The biggest one is that the underlying cost of the equipment you are deducting can't exceed the amount of taxable income you are reporting. Also, be sure you and your accountant check your local and state tax laws that apply to expensing equipment purchases.
However, if a business won't show a profit this year and has purchased eligible new equipment, it can use the 100% bonus depreciation and carry forward the loss to future profitable years. For Section 179 deductions, businesses previously weren't able to claim that deduction for previous tax years. That's changed and you're now able to amend tax returns from 2007 forward and take the Section 179 election.
As with any tax consideration, consult your accountant on all tax questions. For more general information about the Section 179 deduction, go to www.section179.org.