The harvest season is coming to a close and the end of the year is fast approaching, that means it’s time to start thinking about everyone’s least favorite topic: taxes. As a West Texas farmer, you can’t afford to not take advantage of the Section 179 deduction. Not only does this deduction help decrease the amount the IRS thinks you should pay, but it’s also a great opportunity to replace your out your equipment with something modern, updated, and more efficient.
What is the Section 179 Deduction?
The purpose of the Section 179 Deduction is to encourage businesses, including farmers, to put money back into the economy while also doing something good for their business. It was created as a small business incentive.
The good news is that unlike some of the other deductions the government creates, the Section 179 Deduction is actually pretty easy to figure out. For 2016, the maximum amount you can deduct is $500,000. What’s nice about the Section 179 Deduction is that it can be used to deduct the full purchase price of the cotton stripper, tractor, or skid steer you purchase in 2016. The deduction will be made from your gross income. This is a huge change from the way most deductions work, which can only be written off a little at a time each year.
The IRS has placed some restrictions on the Section 179 Deduction. First, the equipment has to have been purchased during the 2016 calendar year. Second, you have to be able to prove that the equipment is being used for business purposes only, which is easy to prove when you claim a cotton stripper or hay baler. The IRS has created a list of some qualifying equipment. Farming equipment falls into the category of “Equipment (machines, etc) purchased for business use.”
The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016, and 2017, but then phases down to 40 percent in 2018 and 30 percent in 2019. It’s important to note that the IRS will only allow you to use this bonus if the equipment you purchased was brand new. Be sure and talk to your CPA about how these options could work for you.
John Deere has provided a helpful graphic outlining more about Section 179. (*Note: it is important to consult with your financial advisor before making decisions specific to you and your operation. This information is intended to be used as a guide.)
You don’t have much time to decide which piece of equipment you should replace and with what you’re going to replace it. The final day that you can purchase equipment and use it as your Section 179 Deduction is 12/31/2016. All the financing for the product has to be completed by that date. You shouldn’t decide to wait until next year to use the 179 Deduction since the amount that can be deducted could be significantly lower.