by Chad Zagar

One of the most effective tax minimization planning tools farmers have available to them is the use of accelerated depreciation — in the form of Section 179 deductions or the use of bonus depreciation. These strategies have been around for decades in one way, shape or form. 

Both tools allow additional up-front deductions on an asset. For instance, the purchase of a $700,000 tractor, without the use of Section 179 or bonus depreciation, would be depreciated over a seven-year period. With the use of Section 179 or bonus depreciation, this asset could be fully depreciated in the first year.

There are differences between Section 179 and bonus depreciation that most notably include the following:

So, what is changing?

The 100% bonus depreciation has been phased down, starting Jan. 1, to only 80%. In other words, that $700,000 tractor you bought (noted above) is maxed at $560,000 of bonus depreciation in 2023, with $140,000 being depreciated over a seven-year period. 

Bonus depreciation will drop after 2023 according to the following schedule:

As you can see, the impact will continue to increase in future years as the depreciation percentage you are allowed to take reduces. It is important to note, if you are below the Section 179 thresholds, you may not see an impact. We will likely see a greater use of Section 179 going forward.

However, it might feel like a double whammy given like-kind exchanges are no longer allowed. In recent years, farmers have taken bonus depreciation to offset gains on the trade of assets (i.e. purchasing a new tractor and trading in the old one). That may not work going forward if you have already maximized your Section 179 deductions.

Also, keep in mind not all states follow the same Section 179 and bonus depreciation rules as the federal tax code. It may make sense to tax-plan earlier this year as the phase-down of bonus depreciation could influence decisions on the farm.

Reach out to your tax specialist, accountant, or your local GreenStone tax and accounting professional if you have questions related to this topic.

Zagar is vice president and managing director of tax and accounting for GreenStone Farm Credit Services.

Source: GreenStone Farm Credit Services