Most farmers are familiar with Section 179 and bonus depreciation. Essentially, both these tools allow additional deductions upfront on an asset.
For example, 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 are that Section 179 doesn’t apply to general-purpose barns, where bonus depreciation does, and that only $1.08 million of Section 179 can be used in 2022 (up to a $2.7 million 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 that $100,000 asset mentioned above, leaving $60,000 of the purchase to be depreciated over a seven-year period. 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 (orchards and vineyards), 100% bonus depreciation can 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 this year when choosing between Section 179 and bonus depreciation. Next year, there will still be the flexibility to decide what tools to use, but the calculation will get harder because of a phasedown of bonus depreciation.
The 100% bonus depreciation will begin to phase down next year, 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 Dec. 31, 2026
Keep in mind that not all states follow the same Section 179 and bonus depreciation rules as the federal tax code. It makes sense to tax-plan now as the phasedown of bonus depreciation could influence decisions on your farm.
Arezzo is a senior tax consultant for Farm Credit East. This article originally ran in the organization’s Today’s Harvest blog.