In terms of tractor and other farm machinery purchases, “there was a huge windfall in the 2013 tax legislation,” says Roger McEowen, director of Iowa State University’s Center for Agricultural Law and Taxation.
One of the greatest sources of uncertainty for farmers in 2012 was over tax provisions set to expire on Dec. 31.
Congress kept everyone in suspense working on the “Fiscal Cliff” package containing the new tax provisions right through 2012 and into the early days of 2013. President Obama signed “The American Taxpayer Relief Act of 2012” on Jan. 2.
With one exception, the Act makes permanent key provisions from 2001 tax legislation originally set to expire in 2010 and later extended to expire in 2012. The payroll tax cut was allowed to lapse, and now all wage earners will see a tax increase in 2013.
Bonus depreciation or expense method?
But what does this mean for operations that purchased machinery in 2012? “The 50 percent bonus depreciation was extended through 2013,” says McEowen.
The bonus depreciation deduction can be taken only on new equipment or on buildings with a 20-year lifespan.
“The federal limit on Section 179 deductions was restored for 2012 at the 500,000 level and extended at that level for 2013,” McEowen says. “The purchase limit for property under expense method depreciation is $2 million through 2013.” Expense method depreciation will drop to $25,000 in 2014 without additional legislation.
“Also, you can make or revoke a Section 179 election on an amended return for an open tax year. That can be an important tool to minimize the impact of higher taxes in 2013,” adds McEowen.
Another good tax planning tool is the ability to elect out of installment sale treatment on deferred payment contracts and other installment sales, McEowen writes.
Farm bill extension and wind-energy credits
The new tax act also included a nine-month extension of parts of the 2008 farm bill, including continuation of the dairy price support program, averting the so-called “dairy cliff.”
The extension package does make cuts in direct payments, although previous 2012 farm bill proposals in the Senate and House called for the elimination of the $50 billion program.
The farm bill extension contains (automatic) cuts to many conservation, energy, specialty crop and disaster assistance programs. Two energy credits survived: The biodiesel tax incentive will continue through 2013, retroactive to 2012; and the wind energy production tax credit is continued.
What’s the take-away from the fiscal cliff legislation?
A renewed battle over the 2012 farm bill will begin again in the new Congress. “Legal issues continue to be at the forefront of developments that are shaping the present and future of American agriculture,” writes McEowen, “and it is very likely that the involvement of the legal system in agriculture will continue to grow.”
Things to remember
• Bonus depreciation can only be taken on new equipment or on buildings with a 20-year lifespan.
• New equipment is eligible for both the bonus depreciation deduction and an expensed deduction. Used tractors are eligible as expensed deductions only; however, you can pick which equipment to deduct.
• You cannot generate a loss under Section 179 deductions. You can also make revoke Section 179 deductions on an amended return for an open tax year.
• Not all states couple their tax legislation to federal tax legislation. For instance, the Iowa Department of Revenue is recommending legislation to couple with all federal changes except the 50 percent bonus depreciation for 2013.
• Watch for planning opportunities if selling assets in 2013.