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Late equipment delivery will lead to loss of tax deduction

Late equipment delivery will lead to loss of tax deduction

No equipment delivery by the end of 2011? No tax deduction.

Farmers are concerned that some farm machinery won’t be available for purchase in time to qualify for the increased tax deductions on equipment, which are supposed to expire at the end of this year.

“It’s frustrating that many of the big-ticket items aren’t available when you want to buy them,” says grower Scott McPheeters, Gothenburg, NE. “A lot of times I have to order machinery at least a year ahead of when I’m actually going to use it. So it certainly is a complicating factor if you can’t get the equipment that you want right away.”

The Small Business Jobs Act of 2010 increased Section 179 tax deductions for either new or used farm machinery from $250,000 to $500,000 for both the 2010 and 2011 tax years. The 2010 Tax Relief/Job Creation Act created a 100% bonus depreciation allowance for new farm assets purchased after September 8, 2010, and before January 1, 2012.

The high demand for farm machinery and increasingly lower inventories on dealer lots are reasons that the tax incentives should be extended, says Charlie O’Brien, vice president of agricultural services, Association of Equipment Manufacturers (AEM). “Right now, availability of product is becoming somewhat of an issue, but a lot of that just has to do with keeping up with demand,” he says.

“Since the 1980s, everybody has learned a valuable lesson about what happens when inventories are high and kept high in a volatile economic environment,” O’Brien says. “If the agricultural economy suddenly goes bad, having those high inventories really puts a big financial strain on both dealers and manufacturers.”

Last year, 41 U.S. organizations signed a letter to President Barack Obama and Congress urging reinstatement of the depreciation bonus and increased Section 179 expensing levels, says Vernon Schmidt, executive vice president of the Farm Equipment Manufacturers Association (FEMA). Those organizations are still working to get the tax credits extended, he adds.

“Our member companies, located in rural communities across this nation, provide hundreds of thousands of manufacturing jobs and represent an industry we need to grow to see a recovery in our economy,” Schmidt says. “So we continue to urge the president and Congress to act quickly to reinstate these important incentives.”

FEMA is also encouraging Congress to make the increased expensing levels under Section 179 permanent and change the IRS Modified Accelerated Cost Recovery System (MACRS) depreciation rate on farm equipment to a five-year depreciation schedule from the current seven-year schedule. The association is also supporting a change in the MACRS depreciation rate on special-use building construction, installed equipment and other equipment to better reflect the useful life of those assets and the changing nature of farm and ranch equipment.

Likewise, the AEM is urging the president and Congress to extend the current tax incentives for farm machinery purchases beyond 2011, O’Brien says. Still, he advises farmers to consider the possibility that no extension will be made.

“I think everybody should be looking to maximize the opportunities available to them as much as they can now,” O’Brien says. “That would include updating and upgrading farm equipment before the end of the year to take advantage of these tax deductions just in case they expire.”

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