Is Section 179 Bonus Depreciation Right for Your Operation?
Year-end machinery and equipment purchases got a jolt of energy just over 10 years ago. The federal government chartered a program that provided a short-term financial incentive for buying prior to the expiration of the calendar year. That program has grown in the years since its inception, but every farmer should examine his or her own financial standing before determining whether leveraging IRS Section 179 bonus depreciation is the right financial decision.
In 2007, the Internal Revenue Service (IRS) established Section 179 of its tax code, allowing businesses to deduct the full purchase price of equipment, machinery, software and other business-related tools (up to a certain amount) from gross income. Bonus depreciation allows financing buyers to write off multiple years of financed equipment all at once, providing the full write-off upon the completion of the purchase by the end of the calendar year. Though applicable in a myriad of industries, Section 179 was a natural fit in agriculture, given the variety and volume of machinery most operations require.
The 2021 Section 179 bonus depreciation program has a deduction limit of $1,050,000, an equipment “phase-out” spending cap of $2,620,000 and enables bonus depreciation of 100 percent. In 2018, qualifying equipment was expanded to include new and used equipment. This remains in effect through 2021. The numbers are slightly increased from last year’s levels, and some states — like Iowa, for example — will offer identical or comparable bonus depreciation programs. Check with your tax specialist to learn more about state programs.
During challenging times in agriculture, incentives like Section 179 bonus depreciation can become more attractive as a cost-savings measure. While there are definite cash-flow benefits to taking advantage of the provision, it should be used only in situations in which it makes long-term financial sense, experts say.
Section 179 for 2019
In the decade-plus since, the maximum financed amount and allowable bonus depreciation have gradually increased. For 2019, see the example provided of how this could create a potential cash savings today (from https://www.section179.org/section_179_deduction/).
“Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income,” according to Section179.org. “It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.”
Whether deducting the full purchase price of qualifying business equipment or machinery (farm buildings do not qualify) is right for your operation depends entirely on your financial footing, your outlook for the coming years and how you stand in meeting current financial obligations, experts say. And there’s one major requirement, something that up until recent years wasn’t necessarily a difficult one to meet: Your business has to show income since the Section 179 deduction is taken from income taxes based on the year’s gross income.
If a farmer has taxable income, they have an opportunity to write off those purchases,” said University of Missouri Extension agriculture and environment specialist in Unionville, Missouri, Joe Koenen. “But, they have to have that positive income because it’s based on adjusted gross income.
When it works and when it doesn’t
Section 179 bonus depreciation isn’t necessarily a savings tool; it’s more an option for farmers in a financial position to make a big-ticket purchase without constraining year-one cashflow. It’s important to manage the acceleration of depreciation so it doesn’t have long-term negative cashflow implications, according to Paul Neiffer, certified public accountant with CliftonLarsonAllen in Yakima, Washington. For example, if receiving the full accelerated deduction in year one of a financing arrangement, it’s important to avoid spending or using that full amount in the same year.
“You really don’t save anything, you simply accelerate the deduction. Instead of deducting it over five or 10 years, the IRS is saying ‘we’re going to let you deduct it all upfront,’” Neiffer said.
If an operation is on solid financial footing and depreciation isn’t used right away but budgeted in responsibly, Section 179 does offer one major benefit: It allows the farmer to manage his or her tax bracket status and optimize income to minimize overall tax expenses.
“A lot of times, we can elect our bonus depreciation and Section 179 to bring our taxable income down to where we want it to be,” Neiffer said. “It allows us to optimize our taxable income, not just bring it down to zero. That is its real power.”
Think long-term with Section 179
Accelerating depreciation also offers potential machinery buyers more flexibility in making purchases if their financial standing will make it sustainable in the long term, according to Koenen.
“It does help, especially if a producer has the money to make the purchase and write it all off, like with a combine. It’s important to make purchases based on how much they have to spend and not buy because of Section 179 when they otherwise wouldn’t,” Koenen said. “But, if you have a really good year, it does allow a lot more flexibility if your business situation makes it work. The bonus depreciation under Section 179 can be a bit of an advantage.”
The key to making Section 179 bonus depreciation work on your operation is in planning ahead. In some past years, the final details of Section 179 have not been established until late in the year, leaving potential buyers scrambling to take advantage of the incentive. Since the ceiling for Section 179 was established early this year, potential buyers can plan potential purchases well in advance, something Koenen said is important in determining whether it is a viable financing option. That decision also depends on what you produce, according to Vermeer regional manager Bryan Setzer.
“As an equipment manufacturer, we see people starting to think about it too late in the year. Once they get a good handle on their income, that’s the time to start thinking about it and talking with your CPA to see if it is the right thing for you,” Setzer said. “If you’re a cow-calf producer and have your calves either sold or priced, you can work with your CPA to establish some certainty on where your income is headed. Row crop farmers should ideally wait until the crop is in the bin, but once they have a pretty decent idea of their price protection and yields, they can start thinking about it. The closer you get to the end of the year, the tougher it gets.”
Equipment inventory concerns
There’s another reason to plan ahead if you intend to leverage Section 179 for an equipment purchase. Waiting until the very end of the year may leave both the buyer and equipment dealer with less-than-ideal purchase options. With fewer models of most equipment on the lot at year’s end, buyers may find themselves left with purchase options that are far from optimal for their operations. That’s why Setzer said it’s important to not only plan ahead, but begin communicating potential purchase plans with your dealer as soon as possible.
“The stories are rampant out there that somebody calls at 3 p.m. on New Year’s Eve and said they have to spend some money. In that situation, your dealer has to sell you basically what he has. As far as getting the perfect options, you’re up to the mercy of your dealer inventory,” he said. “Especially this year, since we have early visibility of this deduction, I’d encourage producers to go sooner rather than later to get an estimate from their accountant to optimize trade-in values as they go to dealerships.”
Vermeer year-end financing opportunities
If you are looking to take advantage of the Section 179 bonus depreciation, you can bundle your savings with the Vermeer Yellow Iron sales event. Qualified buyers can take advantage of special financing rates and cash back on select Vermeer hay tools. Contact your Vermeer dealer for more details and special offers on new 605 N Cornstalk Special balers, 504 R-series balers, TM1410 trailed mowers, BPX9010 bale processors and the ZR5-1200 self-propelled baler, among other new models. Contact your local Vermeer dealer today.