What is in this article?:
- Alabama irrigation tax credit regulations detailed
- Cannot be carried back, forward
• In its most recent session, the Alabama Legislature passed the Irrigation Incentives Bill, which provides a state income tax credit of 20 percent of the costs of the purchase and installation of irrigation systems.
• The bill also allows the tax credit on the development of irrigation reservoirs and water wells, in addition to the conversion of fuel-powered systems to electric power.
Cannot be carried back, forward
The credit cannot be carried back or carried forward, he says.
“Basically, it’s a use it or lose it deal. If you don’t use it, it goes away. It would be very useful, in my opinion, if this credit could be carried forward. Some growers will max out the credit, but the majority of farmers who use it probably won’t.”
For “pass-through” entities such as partnerships and LLC’s, if it’s multi-member, the credit will be based on ownership percentage, says Yeager. If you’re in a 50/50 partnership with someone, they get half the credit and you get half the credit.
“I asked the Department of Revenue, for this tax credit, who is considered the ‘taxpayer’ in the case of a pass-through entity? Is it the individual owners or is it the entity? They said the entity is the taxpayer. With some of the larger farms, we have multiple entities.
“If you’re a partner in three different corporations, you could take this credit three times, since the entity is the taxpayer. You could take it three times in one year, with three different entities, or take one this year, one next year, and one the year after — however it benefits you the most. The best thing to do is to meet with your tax preparer and figure out what’ll work best for you.”
Other tax considerations that’ll apply to both state and federal income taxes include depreciation recovery periods, which are seven years for equipment and 15 years for wells and reservoirs.
The Section 179 Deduction Limit. Many farmers, says Yeager, have taken advantage of the Section 179 Deduction Limit over the past several years and used it to drastically reduce their income tax bills.
“Right now, the limit for 2012 is $139,000, which is down from the past two years. Congress may increase this before the end of the year. Equipment qualifies for Section 179, and it doesn’t have to be new — it can be used equipment. Wells and reservoirs do not qualify.”
The Bonus Depreciation, he explains, is similar to Section 179 in that it expires at the end of this year unless Congress renews it. Equipment qualifies but wells and reservoirs do not, and it must be new equipment.
“Usually, whenever I’m working with someone and we use up all of their Section 179 and then go to Bonus Depreciation and use that up, then we go to regular depreciation. That’s the usual order.”
But Yeager advises growers to be very careful in this area.
“Some of you are probably in a situation where you’ve got very little depreciation going forward because in the past few years, you’ve been writing off most everything you’ve bought. This could put you in a cash-flow bind down the road.
“I’ve seen it happen with producers, mainly with chicken houses. On a seven-year loan, by about year five or six, most of what you’re paying is principal, and you’ve already written off your equipment so there’s no depreciation. You could end up with a large tax bill. A dollar today is worth more than a dollar tomorrow.”