I’m no tax expert. Far from it, in fact. But I’ve been reading a lot about the new tax bill passed late last year, and it seems that the farm equipment business may have received a boost from Congress.
According to the Association of Equipment Manufacturers (AEM), the new Tax Cuts and Jobs Act will provide major, long-term tax benefits for equipment manufacturers and their customers.
The act provides permanent extension of Section 179 expensing and extends bonus depreciation expensing through 2019. Congress had only been extending these provisions on a year-to-year basis — often toward the end of each calendar year, when these tax provisions had diminished benefit for both manufacturers and equipment buyers.
A research note issued by Ann Duignan of J.P. Morgan seems to support the idea that the new tax law will benefit agriculture.
“In general, we believe the tax changes will be a positive for machinery stocks; a 21 percent U.S. tax rate could in itself boost after-tax profits by about 10 percent on average across the group, according to our initial assessment,” she writes. “Additionally, elements of the bill such as accelerated depreciation and larger Section 179 deductions could have a positive impact on underlying equipment demand, especially in key markets such as agriculture and trucking.”
So now that you’re wrapping up your 2017 taxes and beginning to plan for 2018 and beyond, how might the new tax bill affect your particular equipment purchases?
Here’s a quick overview of the changes:
Beginning in 2018, the act would allow farm equipment to be depreciated over a period of five years, instead of seven. It would also remove the requirement that farm property is depreciated using the 150 percent declining balance method (except for 15- or 20-year property).
The act provides for 100 percent bonus depreciation in the year that tangible personal property (excluding buildings and building improvements) is placed in service. This allows for full cost recovery in the year of acquisition, previously 50 percent recovery. This rule applies for property acquired and placed in service after Sept. 27, 2017.
Section 179 allows you to expense the entire cost of Section 179 property in the year of acquisition, up to an annual limit, rather than depreciating the property. The act doubles the amount that can be expensed in a year from $500,000 to $1 million. The $1 million limit is phased out on a dollar-for-dollar basis for each dollar that the taxpayer's Section 179 property exceeds $2.5 million. These amounts would be indexed for inflation beginning in 2019 and do not expire.
In addition, the act provides that these first-year additional depreciation property provisions applies to used property, as well as new property.
Kristine Tidgren, assistant director at the Center for Agricultural Law and Taxation at Iowa State University, recently weighed in on how the new tax law will impact equipment trades.
According to Tidgren, the act preserves like-kind exchange treatment for real property, but eliminates it for personal property.
“By striking the word ‘property’ and replacing it with ‘real property,’ the new law language means that like-kind exchange treatment is still alive and well for real property, but it’s gone permanently for personal property beginning in 2018,” states Tidgren.
“Now, equipment or livestock ‘trades’ will be treated as taxable events, with the taxpayer computing gain or loss based upon the difference between the amount realized on the sale of the relinquished asset and the party's adjusted basis in the asset. The amount realized includes any money, as well as the fair market value of property (other than money) received in the transaction.”
To help explain this rather confusing set of new rules, Tidgren offers up this example:
“Suppose in 2018, Sam trades a tractor with a fair market value (FMV) of $75,000 and an adjusted basis of $0, plus $50,000 cash for a tractor with a fair market value of $125,000. For the 2018 tax year, this transaction will be treated as a sale and a purchase.
“Sam must now recognize $75,000 in recapture (the difference between the FMV of the traded tractor ($75,000) and its adjusted basis ($0)). This transaction will be reported on Part III of Form 4797 and taxed as ordinary income (no self-employment tax). Sam uses the proceeds of the sale, plus an extra $50,000 in cash, to purchase the new tractor.
“Thus, Sam’s basis in his new tractor will be $125,000, the full purchase price of the new tractor. Sam can likely expense this amount in 2018. If Section 179 is not available, he can use 100 percent bonus to capitalize and depreciate the full amount in 2018.”
More than ever, your tax accountant is going to be a significant business partner to help you work your way through the new tax code. There’s no doubt, though, that you might discover additional reasons to begin updating and upgrading your equipment fleet.