The changes in the recent tax reform legislation regarding asset purchases and trade-ins are among the most significant for ag producers. With one provision retroactive, it’s important to understand all of your choices.
SECTION 179 EXPENSING
For the tax year beginning in 2017, under former law, a taxpayer is allowed to expense up to $510,000 of asset additions under Section 179. That number increases to $1,000,000 for the tax year beginning in 2018.
This deduction phases out if the taxpayer acquires eligible assets within the year that exceed a threshold. For the tax year beginning in 2017, that threshold is $2,030,000. For the tax year beginning in 2018, this “too-big-to-get-it” limit starts at $2,500,000 of eligible purchases.
RETROACTIVE 100% BONUS DEDUCTION
Over recent years, new asset acquisitions have been eligible for a 50% first-year bonus deduction. In one of the rare retroactive changes, a business may expense 100% of both new and used asset purchases, effective for property both acquired and placed in service after Sept. 27, 2017. This 100% first-year bonus deduction continues through 2022 then begins a 20%-per-year rate phasedown starting in 2023, eventually reaching zero in 2027.
Retroactive changes can mess up tax planning. The tax law allows a taxpayer for the first tax year ending after Sept. 27, 2017, to retain the former 50% bonus depreciation provision for the entire year.
With these expanded depreciation rules, most ag producers will be able to totally deduct asset acquisitions. The general advice will be to use Section 179, as that provision can be fine-tuned to a precise amount and also amended up or down in a later year.
Section 1031 was preserved in its entirety for tax-deferred exchanges of real estate used in a business or held for investment. However, for equipment and other non-real estate trades beginning in 2018 and after, gain must be recognized to the extent of the value allowed for the relinquished property. The new rule appears to have no impact because the additional gain recognized can be offset by the expanded first-year depreciation deductions.
For those operating as proprietorships or partnerships, the gain is not subject to the self-employed social security tax, whereas the extra depreciation produces a reduction in SE tax. If an S corporation is in its first five years of switching from C status, the gain on disposition would be exposed to the built-in gains tax.