Amortization Bonus, Article 179 Good To Use As Income Management Tools | Ag / Energy

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The current tax law contains two provisions which have been used successfully by farmers and ranchers to manage taxable income.

The subsidized depreciation and expense rules of Article 179 allow the purchaser of a qualifying depreciable asset to deduct 100% of the cost as a depreciation expense for the current year. Eligible assets include, but are not limited to, machinery and equipment, commercial vehicles, single-use farm structures, purchased breeding animals, fences, and trucks that are purchased and put into service during of the year. It is important to understand the differences and the requirements that apply to each of the two provisions. This article briefly discusses these two provisions; therefore, it is necessary to consult your tax advisor to determine the best option to choose.

The amortization of premiums is assumed to be applied unless a taxpayer chooses not to use it. The enhanced depreciation amount reduces both farm and non-farm income, making it a useful option if the taxpayer has received a large amount of royalties or investment income. In addition, the amount of depreciation bonus taken during the current year will have to be recovered if an asset were to be converted from professional to personal use at a later date. The bonus amortization rules offer many advantages in terms of income tax management.

The rules in section 179 require a taxpayer to elect to use this provision when filing an income tax return. In addition, the amount of the Section 179 deduction allowed in a year is limited to the amount of farm income plus the amount of W-2 (non-farm wages) shown on the tax return. Therefore, it does not reduce other non-farm and investment income. If there are 179 excess expenses that are not allowed in the current year, they can be carried forward to future years so that they are not lost. The amount of deduction allowed is also limited. For 2021, the maximum allowable deduction in expenses is $ 1,050,000 of the total assets purchased and put into service during the year, provided that no more than $ 2,620,000 of depreciable assets are purchased and put into use. service. If the asset is converted from commercial to personal use, it is likely that part of the amount of the expenditure incurred under section 179 will have to be recovered in the year in which the conversion takes place.

Here is an example that compares the two layouts. A taxpayer, who has $ 90,000 in farm income and $ 20,000 in investment income in 2021, purchases and operates a $ 100,000 tractor. The Section 179 amount allowed will be $ 90,000 for 2021 and $ 10,000 will be carried over to 2022. The bonus amortization amount allowed will be the total amount of $ 100,000, as the bonus amortization may be used to offset other income.

It is important to consult your tax advisor to assess which of these two provisions will have the preferred outcome in managing your income tax. It is important to keep in mind that the goal of income tax management is to maximize after-tax net income. For more information on farm tax rules, see IRS publication 225, “The Farmer’s Tax Guide,” which can be found by searching the IRS website at https://www.irs.gov.

Milacek is a specialist in the agricultural economy of Northwest Oklahoma Cooperative Extension Service.


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