Most farmers are familiar with section 179 and bonus depreciation. Essentially, both of these tools allow additional deductions up-front on an asset. For instance, the purchase of $100,000 of used equipment, without the use of section 179 or bonus depreciation, would be depreciated over a seven-year period.
Two notable differences between the methods for farmers are that section 179 doesn’t apply to general purpose barns, where bonus depreciation does, and that only $1,080,000 of section 179 can be used in 2022 (up to a $2.7 million dollar threshold). Bonus depreciation has no dollar limitation on how much can be taken. Also, section 179 can be applied to some of the asset’s purchase, whereas bonus depreciation applies to the entire asset.
For example, a farmer can decide to take only $40,000 of section 179 on the asset above, leaving $60,000 of the purchase to be depreciated over a 7-year period. On the other hand, if bonus depreciation was used, the entire $100,000 would be depreciated in the first year, leaving nothing for future years. Notably, for certain fruit and nut-bearing trees (i.e., orchards and vineyards), 100% bonus depreciation is permitted to be taken in the year of planting or grafting under a special provision (Section 179 isn’t permitted until an asset is placed in service, which would depend on commercial viability of the crop in this example).
The good news is that there is continued flexibility in 2022 when choosing between section 179 and bonus depreciation. In 2023, there will still be the flexibility to decide which tools to use, but the calculation will get harder due to a phase-down of bonus depreciation.
100% bonus depreciation will begin to phase down in 2023, at which point it will only be 80%. In other words, that $100,000 piece of used equipment would get $80,000 of bonus depreciation in 2023 with $20,000 being depreciated over a seven-year period.
Bonus depreciation will drop after that according to the following schedule:
- 60% in 2024
- 40% in 2025
- 20% in 2026
- 0% after December 31, 2026.
Keep in mind that not all states follow the same section 179 and bonus depreciation rules as the federal tax code. It may make sense to tax plan earlier this year as the phase-down of bonus depreciation could influence decisions on the farm.
Contact Us to be connected with a Farm Credit East Tax Specialist for more information. .