Contributed by Charles Brown, Farm Management Specialist, Iowa State University Extension and Outreach, firstname.lastname@example.org, 641-673-5841
2014 has ended, but that doesn’t mean that some things can’t be done to increase or decrease taxable farm income. Again, late in the year Congress passed legislation that affected 2014 taxable income. Section 179 Expense Election and bonus depreciation were extended for 2014, but 2014 only. In 2015, the Section 179 Expense Election is back to $25,000 with phase-out starting at $200,000 of qualifying assets and bonus depreciation is gone.
For 2014, the Section 179 Expense Election is $500,000 with the phase-out starting at $2,000,000 of qualifying new or used asset purchases. Section 179 can generally be used on 15-year property or less, which would include farm drainage tile, single purpose ag buildings (confinement buildings), grain bins, machinery, breeding livestock and many farm pickups. You can choose any amount from $0 to $500,000 to be used as a fast write-off in the year of purchase of a single asset or multiple assets, but the aggregate total can’t exceed $500,000. Section 179 can be used on the cash difference paid for the asset. Section 179 must be reduced dollar for dollar for every $1 spent on qualifying assets exceeding $2,000,000. Section 179 reduces both Federal and Iowa taxable income and can reduce business and wage income to $0, but not below $0.
Bonus depreciation can only be used on new, not previously used, asset purchases. Fifty percent of the cash purchase price plus the basis left on any trade-ins can be used in the first year of purchase to reduce Federal taxable income. Iowa does not allow bonus depreciation, so you may reduce your Federal income tax to $0, but could still get hit with a sizeable Iowa income tax. Unlike Section 179, bonus depreciation can create a net operating loss. Also there is no phase-out for the bonus depreciation.
You can use both Section 179 and bonus depreciation on the same asset, but must first use Section 179 and then use bonus on the remainder. For example; confinement building costing $1,000,000, the first year depreciation could be Section 179 of $500,000, bonus depreciation of $250,000 (50 percent of $1,000,000 – $500,000) plus $18,750 (7.5 percent x remaining $250,000) of MACRS depreciation. On the Federal income tax return the total depreciation would be $768,750.
What if you had purchased assets in 2014, but not knowing if and when Section 179 and bonus depreciation would be extended you had deferred some of your grain income to 2015 to keep your taxable income down for 2014? If you are a cash basis taxpayer and have deferred payment contracts, you can pull some or all of those contracts back into 2014 and declare the income for 2014 instead of 2015. It has to be a full contract, you can’t pull back part of the income on a contract.
At this time, we don’t know if Section 179 and/or bonus depreciation will be extended again for 2015, so if you have the capital purchases in 2014 to use the Section 179 and/or bonus, you may want to raise your income in 2014 to take advantage of the accelerated methods of depreciation.
Another option that can be applied after the end of the year is whether or not to expense fertilizer and lime costs or amortize them over a period of years. Expensing them at the time of purchase would decrease taxable income and amortizing them over a period of years would increase taxable income for 2014.
As always, visit with you tax preparer to see what your options are, even though 2014 has ended there are certain tax planning strategies that can still be applied.
Ag Decision Maker (AgDM)
An agricultural economics and business website.