Depreciation is an annual income tax deduction. It allows a taxpayer to recover the cost or other basis of certain property over the time that they use it. When figuring depreciation, taxpayers consider wear and tear, deterioration of the property, as well as whether it’s now obsolete.
Key Updates: How Tax Law Changes Affect Farmers
New Recovery Period for Farming Equipment
- New farming equipment and machinery is now classified as five-year property.
- For property placed in service after December 31, 2017, the recovery period is shortened from seven to five years for machinery and equipment.
Important Exception:
- The shorter recovery period does not apply to grain bins, cotton ginning equipment, fences, and other land improvements.
- Used equipment remains subject to the seven-year recovery period.
Changes to Depreciation Methods
- Property used in farming businesses and placed in service after December 31, 2017 is not required to use the 150-percent declining balance method.
- Farmers and ranchers must continue using the 150-percent declining balance method for:
- Property that is 15 or 20 years old and to which the straight-line method does not apply
- Property for which the taxpayer elects this method
First-Year Bonus Depreciation
- New and certain used equipment acquired and placed in service after September 27, 2017, qualifies for 100 percent first-year bonus depreciation for the tax year in which it is placed in service.
Section 179 Expensing
- A taxpayer may elect to expense the cost of any Section 179 property and deduct it in the year the property is placed in service.
- New Limits Under the Law:
- Maximum deduction increased from $500,000 to $1 million
- Phase-out threshold increased from $2 million to $2.5 million
- For taxable years beginning after 2018, these amounts are adjusted for inflation
Expanded Bonus Depreciation Rules
- Bonus depreciation percentage increased from 50 percent to 100 percent for qualified property acquired and placed in service after September 27, 2017.
- Property placed in service before September 28, 2017, retains the 50 percent rate
Special Rules:
- Apply for longer production period property and certain aircraft
Expanded Definition of Eligible Property
The definition of property eligible for 100 percent bonus depreciation has been expanded to include:
- Used qualified property acquired and placed in service after September 27, 2017, if certain conditions are met
Interest Deduction Limit and Alternative Depreciation System
- Farming businesses that elect out of the interest deduction limit must use the Alternative Depreciation System (ADS) to depreciate property with a recovery period of 10 years or more.
Examples of such property include:
- Single-purpose agricultural or horticultural structures
- Trees or vines bearing fruit or nuts
- Farm buildings
- Certain land improvements
Effective Date: This provision applies starting in tax year 2018.
Frequently Asked Questions
What is depreciation and how does it benefit farmers?
Depreciation is a tax deduction that allows farmers to recover the cost of qualifying property over time. It accounts for wear, tear, and obsolescence, reducing taxable income annually.
What is the new recovery period for farming equipment?
For new farming equipment and machinery placed in service after December 31, 2017, the recovery period has been shortened from seven to five years. However, this does not apply to grain bins, cotton ginning equipment, fences, or used machinery.
Can farmers use bonus depreciation for used equipment?
Yes, certain used equipment acquired and placed in service after September 27, 2017, qualifies for 100 percent first-year bonus depreciation, provided specific conditions are met.
How has Section 179 expensing changed under the new law?
The maximum Section 179 deduction increased from $500,000 to $1 million, and the phase-out threshold rose from $2 million to $2.5 million. These amounts are adjusted annually for inflation.
What happens if a farmer opts out of the interest deduction limit?
Farming businesses that elect out of the interest deduction limit must use the Alternative Depreciation System (ADS) for property with a recovery period of 10 years or more, such as farm buildings and fruit- or nut-bearing trees.