Depreciation Question

[Dan]

How do you depreciate farm equipment? The total of items to depreciate doesn't reach $500,000. I know there are ordering rules. Can you choose not to use the 179 deduction and use only the special depreciation allowance and regular depreciation allowance deduction or must you also choose the 179 deduction?

For example: Farm equipment cost $25,000

If you don't use the 179 deduction, special allowance deduction is $12,500

Regular depreciation allowance deduction is $1,339

Total deduction for year is $13,839.

The question is, do you have to use the 179 deduction first?

For example: Farm equipment cost $25,000

179 deduction is $25,000 all deducted in the first year.

Thanks for your response.

[Dan]

I would like some responses to my question. Thanks

[JohnH]

I can't vouch for the reliability of the source, but here's something I found by googling your inquiry. It appears to have an example that's on target for your question. Of course, yo'd want to verify the information before actually following their advice:

http://www.farm-equipment.com/pages/From-the-September-2013-Issue-Special-Report-How-Special-Depreciation-Rules-Impact-Farm-Equipment-Purchases.php

[Gail in Virginia]

I don't think that you are ever required to use Section 179 depreciation. You are required to use bonus depreciation if the equipment qualifies unless you make an election to not take bonus depreciation for all equipment in the same class (in other words, you can't pick and choose - if you don't want to take it on one piece of 5 year property, you can't take it on any 5 year property.) Basically I am not aware of any difference in treating farm property and property used in other businesses as far as section 179 and bonus depreciation.

[Dan]

Thanks John and Gail for your response.

John I looked at table 1 in the source you sent me. Example 1 in that table only used 179 deduction. The cost of the equipment was $350,000. That amount is less than 500,000. It would seem from that example you could only use the 179 deduction.

It only used both the 179 and bonus depreciation when the cost was over 500,000 as shown in example 2.

Gail, do the ordering rules apply. In the TAXBOOK it talks about claiming the deductions in the following order.

1. Section 179 deduction, then

2. Special depreciation allowance, then

3. Regular depreciation allowance.

It does say in regard to the ordering rules--For assets that are eligible for both section 179 deduction and the special depreciation allowance, a taxpayer is required to recover the cost in the prescribed order. The section 179 deduction must be taken first. What if assets are not eligible for both?

Gail, can you give me documentation of not having to use 179 deduction even though you have to use the special depreciation allowance?

Thanks again for your responses.

[Gail in Virginia]

Dan, as far as documentation I did not look up the rules, but taking section 179 on property is an election that you make. If it were mandatory, I would expect it to either be no choice at all or, like the bonus depreciation, something that had to be elected out of. The instructions for Form 4562 consistently refer to it as an election.

Generally speaking, since Virginia allows section 179 but does not recognize the bonus depreciation, I have never had a reason to want to skip 179 in order to take bonus. Of course, your mileage may vary - that is part of the fun of doing taxes, no two situations are identical.

[Dan]

Thanks Gail

[Lion EA]

If you're asking if you have to take section 179, the answer is NO. Section 179 is an election; you choose to take it on all or part of eligible property; if you make no election, you do not use 179 at all.

If your question is the ordering rules, then YES you start with your 179 election (or no election) and move on to Bonus in whatever flavor is available and finally to regular depreciation. In other words, you don't start with regular depreciation and then apply 179 to the remainder.

Although, when you work out the options for your client, you can work with any or all of your available depreciation options to meet his needs. Sometimes a new business will have higher income as the years go along and benefit more from regular depreciation alone. Some with expected tech purchases each year may benefit from high 179 usage or benefit in a high income year. And, if you're working with a state that does not go along with federal 179 or bonus, you may or may not want to make the federal depreciation match what's available in your state. Depreciation options are a legal way to raise or lower business income to suit your client's cash flow/profit/tax needs.

[Dan]

Thanks Lion

I

[Lee B]

I don't have any farming clients, but I grew up on a farm, so be aware that there are a number of special depreciation rules

and unique lives for farm assets.

[Tax Prep by Deb]

If you're asking if you have to take section 179, the answer is NO. Section 179 is an election; you choose to take it on all or part of eligible property; if you make no election, you do not use 179 at all.

If your question is the ordering rules, then YES you start with your 179 election (or no election) and move on to Bonus in whatever flavor is available and finally to regular depreciation. In other words, you don't start with regular depreciation and then apply 179 to the remainder.

Although, when you work out the options for your client, you can work with any or all of your available depreciation options to meet his needs. Sometimes a new business will have higher income as the years go along and benefit more from regular depreciation alone. Some with expected tech purchases each year may benefit from high 179 usage or benefit in a high income year. And, if you're working with a state that does not go along with federal 179 or bonus, you may or may not want to make the federal depreciation match what's available in your state. Depreciation options are a legal way to raise or lower business income to suit your client's cash flow/profit/tax needs.

Nicely explained!

Deb!