With the ink barely dry on the regulations governing Alabama’s new irrigation tax incentive, the best advice is to check with your accountant or tax preparer before claiming it.
“If you think you’re going to qualify for this credit, you really need to meet with your tax preparer and do what is best for your specific situation,” says Jamie Yeager, field economist with the Alabama Farm Analysis Association.
Yeager discussed the new tax credit during the recent Alabama Irrigation Summit, held in Montgomery.
“I don’t think they’ve finished writing the regulations on this yet, so some of this may change. But the Alabama Department of Revenue was fairly final on most everything,” said Yeager on Aug. 15.
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.
The one-time credit cannot exceed $10,000 per taxpayer, and it must be taken in the year in which the equipment or reservoirs are placed into service.
The credit is good, says Yeager, for all tax years beginning after Dec. 31, 2011, or for 2012 and beyond.
Any agricultural trade or business shall be allowed an income tax credit of 20 percent of the cost of the purchase and installation of any qualified irrigation equipment, or any conversion cost related to the conversion of fuel to electricity or qualified reservoirs, he says.
“This tax credit is for state of Alabama income tax only. It has no effect on federal income tax or self-employment tax. When I sit down with farmers in the fall to do their tax preparation, generally, the tax we’re most concerned with is federal income tax and self-employment tax because that’s where you can make the most headway with any tax problem.
“Self-employment tax is 13.3 percent, and most farmers I work with are in a 15 to 25 percent bracket. So if you add those together, you’re looking at roughly 30 percent between the two,” says Yeager.
The state income tax rate is about 5 percent, he adds, so it’s not as big an issue as is the federal tax.
“Since it’s an Alabama tax, you have to be an Alabama taxpayer to claim the tax incentive. You have to have an agricultural trade or business that qualifies under the NAICS Sector 11 Designation.
“How do you know if you qualify under that? If you filed a Schedule F last year, in the top center of that schedule is a code. Most all agricultural enterprises have an 11 in front of it. If you’re a farmer and you file a Schedule F, you’ll qualify,” he says.
The agricultural activity must occur within Alabama, says Yeager, and you must conform to existing environmental and water quality regulations.
A qualified reservoir, which is an off-stream upland pond or lake with the sole purpose of being a source of water for irrigation, qualifies for the credit, he says. “You can’t dig a pond to water cattle or a recreational pond and qualify for this credit.”
Pretty much all irrigation equipment — pivots, pumps, pipes — will qualify, says Yeager. “The conversion of irrigation from fuel to electricity also qualifies. If you’ve got diesel irrigation and you want to convert it, this may be an opportunity to take advantage of this credit.”
The credit can be taken only in the year the property is placed into service, he says.
“The placed-into service date is the date that it is ready and available for use. It’s not the date that it’s necessarily used. If you get your crop in this fall, and you decide you want to put in a pivot, and you put down a deposit on it but they don’t come construct it until after the first of the year, you’ve got a credit for 2013 and not 2012. If they finish it on Dec. 31, 2012, then you’ve got a 2012 credit.”
The credit is 20 percent of the un-reimbursed costs or $10,000, says Yeager. If you cost-share with NRCS or some other agency on a program, then that must be taken into consideration.
For example, if you put in a $100,000 reservoir and the agency cost-shares for $40,000, you’ve got $60,000 towards which you can apply the credit. At 20 percent, that’s $12,000, so your credit is the maximum $10,000.
The credit, he continues, is limited to one purchase or installation of equipment or a reservoir per taxpayer, it is non-refundable, and it can only be applied in the year in which it’s placed into service.
“If you’ve got a ‘0’ state income tax liability, and even if you qualify for the $10,000 credit, you don’t get any credit. If you have a $2,500 tax liability, you get a $2,500 credit.”
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.”