The 2010 Tax Relief Act, enacted in December, contained an important business stimulus provision that should be of particular interest to ag producers and farm landlords. Here is a brief summary of key opportunities:
Overview of 100% Bonus Depreciation Eligibility
The tax law allows a 100% first-year bonus depreciation deduction for the cost of new assets (but not used assets) placed in service from September 9, 2010 through December 31, 2011. For 2012, bonus depreciation applies at a 50% rate.
To qualify, the property must have a depreciable life of 20 years or less; this definition fits virtually all farm assets. Further, if the new asset is acquired via trade, the 100% deduction applies both to the boot paid to accomplish the trade, as well as any remaining undepreciated basis in the relinquished asset.
While all new farm machinery qualifies, there are three categories of farm assets that are of particular interest with this 100% depreciation opportunity.
Machine Sheds and Shops
Normally, a machine shed or shop or other general purpose farm structure is a 20-year depreciable asset, and is not eligible for the Section 179 first-year expensing deduction. But those assets do qualify for 100% bonus depreciation in 2011, and 50% bonus depreciation if placed in service during 2012. The ability to fully deduct in 2011 an asset that otherwise takes 20 years on a depreciation schedule represents a significant tax opportunity.
Landlord Improvements
Landlords face technical difficulty in qualifying for the Section 179 first-year expensing deduction. But the 100% bonus depreciation deduction is available for major asset additions, such as drainage tile (normally a 15-year recovery period), or other landlord improvements, such as wells and irrigation systems or farm building improvements.
Landlords contemplating these asset additions should consider accomplishing those improvements during 2011 when the 100% bonus depreciation applies, or, failing that, in 2012 when the lower 50% deduction is available.
SUVs and Other Over 6,000 Pound Vehicles
Cars and light trucks with a weight rating of 6,000 pounds or less face restrictive depreciation rules, generally permitting only small annual deductions in the range of $3,000-$4,000 per year. In general, vehicles with a Gross Vehicle Weight rating (GVW) over 6,000 pounds are eligible for up to $25,000 of Section 179 first-year expensing.
But in 2011, if the vehicle is new rather than used, 100% bonus depreciation allows the entire cost of an SUV or short-box pickup over 6,000 pounds to be deducted. However, this development is not important for those who might acquire a full-size pickup with a cargo area of at least six feet in interior length, as those vehicles qualify for a full Section 179 deduction under present rules.
If you have any questions regarding this new 100% bonus depreciation opportunity, please contact us. It is a pleasure serving you.
