What is in this article?:
- Direct expensing can reduce farm tax burden
- Equipment purchase example
• An option for decreasing net farm profit in a year of higher income is to use direct expensing.
• This decision can be made after the end of the tax or calendar year and before filing.
First-year Direct Expensing (Section 179) is an election in IRS code that allows businesses like farms to deduct the cost of capital purchases as a tax deductible expense.
In 2011 up to $500,000 of personal property capital purchases may be direct expensed if placed in service by the end of the year.
In most cases the capital purchases that qualify are personal property used more than 50 percent of the time in the business. The property may be new or used.
Examples of eligible property include farm machinery, breeding livestock, grain bins and other single purpose agriculture or horticultural structures.
In addition, off-the-shelf computer software is currently eligible property.
Single purpose structures do not include farm shops or general purpose farm buildings.
There are several limitations that apply for direct expensing.
If the farm business purchases and places into service over $2 million dollars’ worth of qualifying property then the $500,000 limit is reduced dollar for dollar. For example if a farm buys $2,125,000 worth of equipment then the amount of First-year Direct Expensing (Section 179) allowed is limited to $375,000. If the business purchases $2,500,000 or more in 2011 then no direct expensing is allowed.
The amount is also limited to the combined taxable income before the deduction derived from the active conduct of all trades or businesses.
Section 1231 gains and losses reported on form 4797, such as sales of breeding livestock and machinery are taxable income as well as wages.