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Depreciation Of Farm Asset
Changes…
Wesley Tucker
Depreciation Changes
~ Consult your tax preparer before purchases
~ Make strategic purchases
Recovery Periods (5yr vs. 7yr)
New farm equipment and machinery placed in service
after December 31, 2017 are classified as 5-year MACRS
property rather than 7-year
Used farm equipment and machinery purchased remains
7-year MACRS property
Recovery Periods (5yr vs. 7yr)
~ Assets must be used in farming business
~ Equipment used in incidental processing activities is
included
~ Equipment used in contract harvesting of a crop
produced by another tax payer is not
Rate of Depreciation
~ Old Law
Straight Line
150% Declining Balance
~ New Law
200% Declining Balance
15-20 year property remains 150%
Example
~ New Combine bought in 2017
($430,000 / 7yr) * .5 x 150% = $46,071
~ Bought in 2018
($430,000 / 5yr) * .5 x 200% = $86,000
$100,000 – 7 Year Asset – Mid Year ConvYear GDS – DB
200%GDS – DB
150% GDS – SL ADS – SL Section 179
1 $14,290 $10,714.29 $7,143 $5,000 $100,000
2 $24,490 $19,132.65 $14,286 $10,000
3 $17,490 $15,032.80 $14,286 $10,000
4 $12,490 $12,248.95 $14,286 $10,000
5 $8,930 $12,248.95 $14,286 $10,000
6 $8,920 $12,248.95 $14,286 $10,000
7 $8,930 $12,248.95 $14,286 $10,000
8 $4,460 $6,124.47 $7,143 $10,000
9 $10,000
10 $10,000
11 $5,000
Section 179
~ Maximum deduction increased from $500,000 to $1
million
~ Phase-out threshold increased from $2 million to $2.5
million
~ Adjusted for inflation
Bonus Depreciation
~ Property placed in service after September 28, 2017 eligible for 100% Bonus Depreciation through 2022. Reduced by 20% each year until 2027.
~ Now applies to USED property
~ If not used by the taxpayer at any time prior to the acquisition
~ No maximum limit
Caution
~ Rate of Depreciation
~ Shorter Recovery Periods
~ Bonus Depreciation
~ Decision By Class
~ Plan Strategically
Can even use Alternative Depreciation System (ADS) to lengthen recovery period
Vehicle Depreciation Rules
GDS ADS
Over-the-road tractor 3 4
Lightweight trucks 5 5
Heavy general purpose trucks 5 6
Passenger vehicles 5 5
Vehicle Depreciation Rules
~ Over-the-road = designed to tow a trailer and does not carry cargo on same chassis as the engine
~ Trailer and containers are 5-year however
~ Lightweight trucks = unloaded vehicle weight 6,000 to 13,000 pounds
~ Heavy general purpose truck = unloaded vehicle weight >13,000 pounds
~ Passenger vehicle = unloaded gross vehicle weight (GVW) <6,000 pounds
Passenger Automobile Rules
I.R.C. 280F limits amount of depreciation
Ambulances, hearses, and other vehicles used directly in trade or business of transporting persons or property are excluded from the limits.
Tax year 1: $10,000 ($18,000 if bonus depreciation is claimed)
Tax year 2: $16,000
Tax year 3: $9,600
Tax year 4 and after: $5,760
These limits are based on 100% business use and must be prorated if less than 100%
Substantiation of Use
~ When vehicles are used for personal and business use, can
only deduct the expenses attributable to business use.
~ Required detailed record keeping
~ Farmers can use 75% without any records if used the
vehicle during most of the normal business day directly in
connection with the business of farming.
Section 179 Limit on SUV’s
Limited to $25,000 for vehicles primarily designed to carry passengers, not subject to section 280F (less than 6,000 GVW), but with GVW 6,000 -14,000 pounds.
~Does not include:
~ Vehicles with seating capacity of more than 9 persons behind drivers seat
~ Vehicles with cargo area of at least 6 feet in length that is designed as an open area and is not readily accessible directly from the passenger compartment
~ Vehicles that have an integral enclosure fully enclosing the driver compartment and load carrying device.
Section 179 Limit
~ Half-ton pickup with crew cab and short box, is it a truck
or SUV?
~ If crew cab often the bed is less than 6 feet, so is
considered a SUV.
~ Don’t forget to adjust for % business use
Section 179 vs Bonus Depreciation
~ Section 179
~ SUV limits
~ Single purpose livestock structure vs. general purpose building
~ Bonus Depreciation doesn’t have the same limits
~ Bonus is 100% or 0%
~ Section 179 is to the penny
~ Bonus is by class
Caution
~ Rate of Depreciation
~ Shorter Recovery Periods
~ Bonus Depreciation
~ Decision By Class
~ Plan Strategically
Related Parties
~ New law clarified that Section 179 and Bonus
Depreciation are not available on transactions from
related parties
Like Kind Exchanges
~ Eliminated tax-free exchanges for personal property
~ I.R.C. 1031 continues tax-free exchanges for real
property
~ Now trade-ins will be a taxable event and must
recognize the gain
Example
~ Purchase new combine for $397,000
~ Trade in old combine for $112,000 trade-in allowance,
which reduces cash price to $285,000 ($397,000-$112,000)
~ Old combine has a $62,262 remaining basis. ($250,000
original cost - $188,738 accumulated depreciation)
Example
~ Prior law trade-in would be have qualified as section 1031 tax-free like-kind exchange. Basis in new combine would be $285,000 cash paid + $61,262 adjusted basis in old combine.
~ New law – Taxable event – two transactions
~ Sale of old combine
Sale price $112,000
$50,738 taxable gain ($112,000 - $61,262 basis)
Reports gain on Form 4797.
~Purchase new combine
$397,000 purchase price and basis
Example
~ Old law $346,262 basis in new combine to depreciate
~ New law $397,000 basis in new combine to depreciate and $50,738 taxable gain from old combine
~ Which is better?
Self Employment Taxes – 15.3%
Saved $7,763 in SE taxes
Example #2
~ Farm Profits of $500,000
~ Buy tractor for $500,000
Trade in old tractor worth $200,000 originally purchased for $350,000 fully depreciated. Pay $300,000 cash boot
~ Old Law – 1031 exchange
New basis is $300,000 put on depreciation
Section 179 full $300,000
Net income is $200,000 ($500,000 profit - $300,000 depreciation)
Pay self employment tax of $30,600
Example #2
~ Farm Profits of $500,000
~ New Law
Sell old tractor
$200,000 sale price - $0 basis = Depreciation recapture of $200,000
Buy new tractor
$500,000 purchase price
Section 179 full $500,000
Net income is $0 ($500,000 profit - $500,000 depreciation)
Self employment tax $0
Both laws pay Federal 24% - State 6% = $60,000
Old law pays $30,600 SE tax
Depreciation Recapture
~ Buy a cow for $1,000
Take $800 depreciation over the next few years
So your basis is $200
Sell the cow for $600
Do you have long term capital gain?
No, must recapture $400 at ordinary income rates
If sold cow for $1,200, would recapture $800 at ordinary income rates and $200 of capital gains
Business Use Falls to 50% or less
~ Vehicles that are over 50% business use are eligible for
Section 179 and Bonus Depreciation
~ However, in the year they fall to 50% or less business
use, must recapture the accelerated depreciation used.
~ Also counts against Self Employment (SE) Taxes
Donation of Assets
~ If I sell a commodity and donate the cash to a qualified charitable organization I receive a deduction if I itemize, no deduction if I don’t.
~ However, I still pay SE tax on the sale of commodity
~ Standard deduction for MFJ from $13,000 to $24,000, single $6,500 to $12,000
Therefore very few will itemize
Donation of Assets
~ If I gift a commodity or asset to a qualified charitable organization I do not have to claim the income from the sale of that asset
~ Saves federal and state income taxes, but also SE tax
~ Lower my tax bill even if I do not itemize
~ Option for mandatory distributions from IRA’s
Proper Procedure
~ Title to the commodity must be transferred to the charity
BEFORE it is sold.
Example, corn delivered to an elevator with a storage or warehouse receipt made out to the charity. Charity receives the warehouse receipt along with a letter from the farmer stating the corn belongs to the charity and that the charity may sell the corn as it sees fit.
It’s Time to Plan!!!
~ Today is November 19, 2018
~ 42 days left to make decisions
~ Make use of the time you have!
