On Dec. 17, 2010, President Barack Obama signed The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) in an effort to stimulate the economy.
This legislation includes important depreciation and IRC Sec. 179 deduction changes to encourage spending by businesses.
These changes were retroactive to Sept. 9, 2010, and will benefit both large and small companies.
Bonus depreciation and the cattle business
The new law allows 100 percent first-year bonus depreciation for qualifying new assets such as breed or dairy stock, equipment, fencing, furniture, grain bins, land improvements, large trucks (100 percent business use and over 6,000 pounds), machinery, most purchased software, farm buildings and qualified leasehold improvements acquired and placed in service between Sept. 9, 2010 and Dec. 31, 2011.
The placed-in-service deadline is extended to Dec. 31, 2012 for certain assets that have longer production periods, including transportation equipment and aircraft.
Simply put, the taxpayer can expense 100 percent of the purchase price of new personal property acquired between Sept. 9, 2010 and Dec. 31, 2011.
Assets acquired in 2012
The new law allows 50 percent first-year bonus depreciation for eligible assets placed in service during the 2012 calendar year.
Additionally, the placed-in-service deadline is extended to Dec. 31, 2013 for certain assets that have longer production periods.
For example, if you purchased a new Ford F-450 (five-year property) or put up new fencing (seven-year property) for $40,000, the depreciation deduction would be bonus depreciation of $20,000, plus the first year depreciation of $3,000 or $2,142 respectively.
Impact of bonus depreciation on autos and light trucks
In March, the IRS issued the 2011 inflation adjustments to the depreciation limitation amounts for automobiles and light trucks (under 6,000 pounds).
This year, the IRS has provided the limitation amounts for vehicles placed in service in 2011 that qualify for bonus depreciation and for those vehicles that do not qualify for the bonus depreciation.
• For new passenger autos used 100 percent for business that qualify for bonus depreciation and are placed in service in 2011, the depreciation limit is $11,060 for the first tax year.
• Light trucks and vans used 100 percent for business to which bonus depreciation applies have a slightly higher limit of $11,260 for the first tax year.
• For used or previously owned passenger automobiles (other than trucks or vans) placed in service during calendar 2011 to which bonus depreciation does not apply, the depreciation limit is $3,060 for the first tax year.
For trucks and vans to which bonus depreciation does not apply, the limit is $3,260 for the first tax year.
• With or without bonus depreciation, automobiles and light trucks are depreciated the same.
• For passenger automobiles, the taxpayer may take only $4,900 for the second tax year, $2,950 for the third tax year and $1,775 for each successive tax year.
• For light trucks and vans, the taxpayer may take only $5,200 for the second tax year, $3,150 for the third tax year and $1,875 for each successive tax year.
No difference for alternative minimum tax
The 100 percent and 50 percent first-year bonus depreciation rules apply for both regular tax and alternative minimum tax (AMT) purposes; therefore, assets subject to the bonus depreciation rules have exactly the same depreciation deductions for both regular tax and AMT purposes.
Bonus depreciation is discretionary
If a taxpayer determines that 100 percent bonus depreciation is not beneficial, it is possible to elect to take 50 percent bonus depreciation or to not take any bonus depreciation.
This election is made by asset class, so it is not an all-or-nothing proposition.
Additionally, the 2010 Tax Relief Act extends the provision that allows C corporations to forgo bonus depreciation deductions and instead “free up” otherwise unusable research tax credit and minimum tax credit carryovers for qualified assets placed in service by Dec. 31, 2012 (Dec. 31, 2013 for certain longer-lived assets).
Expensing the cost of purchased equipment
In 2003, Congress significantly increased the IRC Sec. 179 deduction by $76,000 to $100,000 to induce businesses to invest in equipment.
For the tax years beginning in 2010 and 2011, the Small Business Jobs Act dramatically increased the maximum deduction to $500,000 with a phase-out threshold of $2 million.
For assets placed in service in tax years beginning in 2012, the maximum Section 179 deduction is $125,000 (adjusted for inflation) with a phase-out threshold of $500,000.
As a planning note, if Congress does not extend the provision again, the Sec. 179 limits will revert to $25,000 and $200,000 respectively beginning in the 2013 tax year.
Eligible assets are similar to qualified bonus depreciation, with the exception of land improvements.
However, cattle ranchers may have a number of assets that the IRS considers other tangible property that will qualify for the Sec. 179 deduction such as: fencing, paved feedlots, water wells, drainage tiles, grain bins, corn cribs, other storage tanks and silos.
In contrast to qualified bonus depreciation property, Sec. 179 property can be either new or used. Sec. 179 expensing can be combined with bonus depreciation for an even greater tax benefit.
However, the deduction created by Sec. 179 expensing cannot create a net operating loss for the taxpayer, while there is no such limitation on bonus depreciation deductions.
In most cases the Sec. 179 deduction can be a tool to reduce state income taxes, whereas bonus depreciation is disallowed by most state taxing authorities.
These 2010 tax changes will impact your cattle business through 2012 and give you the opportunity to increase your after-tax cash flow and ultimately your bottom line.
For more information or questions about your specific situation, please consult your tax professional or contact us at Frost PLLC.
Scott Gammill is the managing director of Cost Segregation Services at Frost PLLC. Rob Gunther, CPA has extensive tax and consulting experience in agribusiness with specific focus on the cattle industry. He is currently a senior tax manager with Frost, PLLC in Little Rock, Arkansas.
For any new equipment or personal property acquired between Sept. 9, 2010 and Dec. 31, 2011, a taxpayer can expense 100 percent of the purchase price according to new tax policy passed last year. Photo by David Cooper.