Q. I am dealing on a new tractor. The dealer wants $200,000. He said he would allow me $80,000 for my old tractor so my “boot” would be $120,000. I really think my old tractor is worth more than that. The old boy is completely depreciated out. Any thoughts?
A. Well you have a lot of issues here.
First, one of the things you have to be concerned about is whether the “old boy” will actually sell. You must decide if it is worth the risk.
Second you must consider the tax advantages that may be realized by the outright sale of your existing tractor. The tax advantage is that since you are a Schedule F farmer you do not have to pay Social Security and Medicare tax on the equipment sale but do get a Social Security and Medicare deduction on the new equipment depreciation. In your circumstances this saves you the 15.3% tax that after adjustment is a real rate of 13.3% rate for 2011 (up to a maximum of $106,000).
For example: A married taxpayer with 2 children, $30,000 of non-farm income, and $125,000 of farm income before the transaction. The new tractor is $90,000 with a $30,000 in trade with boot of $60,000. Assume instead of trading the old tractor for $30,000 he can sell it for $30,000. Here is the comparison that you must do.
Facts: Before the transaction the taxpayer is looking at a tax bill of $42,988.
Option One: With the trade in, there is a potential to show $60,000 (the cash boot trade-in) as a 179 expense election depreciation write-off on the schedule F reducing it to $65,000 farm income. Estimated taxes of $19,461
Option Two: With buying the tractor for $90,000 and selling outright for $30,000. Estimated taxes of $16,239
Every situation is different and this works very well in this example because the savings is in Social Security and Medicare tax. If this was a rental operation or a corporation the results would be different.
Lesson learned. It is good to check to see exactly how equipment purchases and trade in fits your particular situation.
Remember that the expense election limit for 2011 is $500,000 with maximum total purchases below $2 million. Next year this is scheduled to go to around $125,000 limit on max of $800,000.
