We’re quickly rolling into the first full tax year filing under the Tax Cuts and Jobs Act passed in 2017. While the changes are extensive and might affect filers in a variety of ways, for agriculture the changes are mostly positive.
That’s especially true when it comes to Section 179 expensing.
The act provides permanent extension of Section 179 expensing and extends bonus depreciation expensing through 2019.
The Section 179 deduction limit for 2018 was raised to $1 million with a total equipment purchase cap of $2.5 million.
This is a significant increase from the 2017 Section 179 tax deduction which was set at a $500,000 deduction limit with a threshold of $2 million in total purchases.
Section 179 gives you the opportunity to deduct the full cost of equipment from your 2018 taxes up to $1 million, targeting purchases anywhere from $5,000 to $2.5 million. Once the $2.5 million limit is reached, the deduction decreases on a dollar-for-dollar basis and expires when $3.5 million worth of equipment is purchased, making it a true incentive for many farm operations.
The new tax law also increased first-year bonus depreciation to 100 percent and expanded qualified property to include both new and used equipment purchases. Bonus depreciation was previously set at 50 percent between 2015 and 2017 and only included new assets.
According to the website Section179.org, farmers can use Section 179 Qualified Financing for all business equipment purchases.
Looking forward, the Section 179 is again set at $1 million for 2019 and beyond, while the limit on equipment purchases remains at $2.5 million. The bonus depreciation is 100 percent and has been made retroactive to Sept. 27, 2017. Plus, the bonus depreciation will remain for used equipment.
The 100 percent bonus depreciation amount will remain in effect until the end of 2022 when the following phase-down will occur:
- 80 percent for property placed in service after Dec. 31, 2022, and before Jan. 1, 2024;
- 60 percent for property placed in service after Dec. 31, 2023, and before Jan. 1, 2025;
- 40 percent for property placed in service after Dec. 31, 2024, and before Jan. 1, 2026;
- 20 percent for property placed in service after Dec. 31, 2025, and before Jan. 1, 2027.
As you’re doing tax planning for 2019 and beyond, equipment upgrades will certainly be on the table. Leasing vs. purchasing outright might be a topic for consideration.
John Deere Financial’s manager of ag finance integration, Jeff McDaniel, recently told me why leasing has been a popular option for many producers.
“The reasons are extensive,” McDaniels says. “Many lessees chose to structure their leases to include installation, maintenance and other services. And lease products may offer the flexibility to address a customer’s specific needs and requirements for cash flow, budgets, cyclical fluctuations and so on.”
He adds that “leasing equipment may help better manage balance sheets and improve an overall financial picture by freeing up working capital and bank credit lines for input costs, expansion, emergencies, etc. Terms of the lease may be matched to individual customer needs, and payment dates are flexible to align with a customer’s cash flow.
“Customers who lease may also find that they’re better able to keep up with equipment technology. Leases typically run three to five years, allowing farmers to upgrade their equipment to the latest technologies in a reasonable time period,” he says.
Section179.org mentions that the main benefit of a non-tax capital lease is that you can still take full advantage of the Section 179 deduction, yet make smaller payments. With a non-tax capital lease, you can acquire and write-off up to the deduction limit’s worth of equipment this year, without actually spending that amount this year.
In other words, a farm that is managing cash flow can leverage a non-tax capital lease to minimize out-of-pocket cash and still take the full Section 179 deduction. Examples of non-tax capital leases include a $1 buyout lease and a 10 percent Purchase Upon Termination (PUT) lease.
In addition to equipment purchases, other eligible items may include “off-the-shelf” computer software, breeding livestock and single-purpose structures such as milking parlors. Of course, before making any large capital purchases, it’s a good idea to consult with your accountant, tax advisor or financial planner to make sure deductions are claimed according to the Section 179 code.
Michael Gustafson has written for and about farm equipment companies, their products and dealerships for more than 40 years, including 25 years with John Deere. He lives on a small acreage in Dennison, Ill.