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  1. #1
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    Default New tax laws

    My dad and I are looking at buying a new tractor and possibly new haying equipment and wondered about the new tax laws. A dealer came to look at my old Ferguson the other day to take in on trade and he started talking about how all the folks that could afford it were buying new because they could deduct 100% of the investment up to $100,000 and then deduct it again as depreciation because of the new tax laws. Now that sounds too good to be true. What's the catch? If I buy $50,000 worth of haying equipment uncle sam is gonna send me a big fat check for all of the tax I have paid in at my auto worker job? So long as I file on the farm too? I know he wants to sell tractors but is he lying to do it?

  2. #2
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    Default Re: New tax laws

    Wouldn't go so far as to say he is lying, but I believe he is seriously mistaken. I'm not a tax attorney or CPA, but this is what I think is true:

    The $100,000 writeoff is an extension of the existing writeoff laws which were at $17K and later extended to, I think, $25K.

    It is simply an accelerated depreciation that allows a business to take a writeoff in one year instead of over a normal depreciation life. It can't be taken twice.

    It has to be an investment in an item intended to produce a profit by a qualified business.

    Unless your business routinely buys more than the previous limits in any given year, this writeoff has always been available.

    It's an accounting trick to encourage businesses to take a one-time credit for buying something they might not otherwise have purchased. They give up the straightline depreciation that occurs every year over the life of the item. In order to get the writeoff next year, you have to buy more stuff. This is good for the economy.

    Check the rules carefully - if you sell the item before the normal depreciation period ends, you may have to recover the difference and pay back the amount you didn't use.

    Take these thoughts to your tax consultant - there are no Holiday Inns in my area. [img]/forums/images/graemlins/wink.gif[/img]

  3. #3
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    Default Re: New tax laws

    I have previously posted info on this new tax law on the board as have others. Here is a quote from Deere's site along witht he reference URL.


    "New tax savings offer unprecedented opportunity to update equipment

    This could be a win-win for you and your farming operations! The new law offers additional first-year depreciation on capital investments made after May 5, 2003, and prior to January 1, 2005.

    (Be sure to consult with your tax advisor to gauge how the provisions of the Jobs and Growth Tax Relief Reconciliation Law of 2003 might benefit your operation.)


    Determine the impact

    John Deere has developed an easy-to-use, Microsoft® Excel-based calculator that you can use to help determine the impact of the new depreciation allowance on equipment purchases for your operations.

    Example

    Using a John Deere 8420 MFWD Tractor (adjusted basis of $160,000) as an example, the depreciation in the first year of a normal schedule would be $17,143. With the election of the 50 percent allowance, the first-year depreciation on this same tractor would increase to $88,571. This would result in a potential tax savings of $25,000 for the year of purchase.


    “The additional depreciation offers significant tax savings over the near term, while the investment in new equipment technology can deliver benefits of improved operating efficiency and productivity over the long term,” says Thomas Jarrett, director of taxes, John Deere.


    Details of the new law

    In May, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was passed by Congress and signed into law by President Bush. For farmers, the act provides the chance to take additional first-year depreciation amounting to 50 percent of the tax basis/cost on capital investments made after May 5, 2003 and prior to January 1, 2005.


    The new tax law pertains to both mid-year (half-year) and mid-quarter convention depreciation methods. The additional first-year depreciation is not available on used equipment purchases. Equipment buyers also need to be aware that the 50 percent depreciation option applies on an asset-class basis. Simply put, producers who want to apply the additional depreciation to one piece of new equipment purchased after May 5 are required to apply it to all new equipment purchases within that asset class. Finally, the additional first-year depreciation should not be viewed as an investment credit.


    Another intriguing component of the new tax law is a significant increase in the Section 179 Expense Deduction. Under the old rules the Section 179 allowance was capped at $25,000. The new law – in place for the 2003, 2004 and 2005 tax years – increases that amount to $100,000. This means you can immediately deduct 100 percent of the cost (up to $100,000) of most new and used equipment for the year it’s put into service. It’s important to note that a person wanting to use the full 179 Expense Deduction must have a taxable income of at least $100,000. Also, the provision applies only to individuals who acquire no more than $400,000 of equipment during the year (up from the $200,000 limit of the previous tax code). Every dollar in purchases exceeding the $400,000-limit decreases the Section 179 Deduction by a dollar.


    Be sure to consult with your tax advisor to gauge how the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 might benefit your operation. "

    http://www.deere.com/en_US/ag/featur...aw-jul-03.html

    Hope this helps

    Andy


  4. #4
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    Default Re: New tax laws

    Thank You! That sheds some light on the subject. It still does not answer the question for my particular case exactly, but I do know I fit in that category. I want to take an accelerated depreciation on a new tractor, round roller, and disc mower. I do make slightly more than $100,000 per year. If I purchase this new equipment at a cost of $37,000, and I have paid in $25000 in federal income tax will I get that back? Then how long will it take me to depreciate the remainder? This will be the first year we have filed anything to do with the farm, so will that hinder me? We do own 170 acres. We have a few cattle, registered boer goats and a couple horses so we have been sqaure baling hay as well doing some for other folks and taking on some of the small jobs that noone else wants. We have never had any real income from the farm. However if I can buy this equipment I plan to start custom haying for folks. How's uncle sam gonna look at my situation? [img]/forums/images/graemlins/confused.gif[/img]

  5. #5

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    Default Re: New tax laws

    WARNING: I am not an accountant this is just based on my limited understaning.

    Talk with an acoutant, and not just one that wants to maximaize your refund.

    These laws are very complicated:
    1) Do you "materially partcipate" in the farming operation?
    There is a page of rules about wheter you meet this test.

    2)Your bio says "hobby" farmer. That term means something to the IRS and would disqualify you from a SR179.

    3) If you don't make money 3 out of every 5 years they can audit you and if don't meet a series of tests (~5-6 if memory serves) they will declare you a "hobby farm" which means you are not trying to make money in their view. Then the SR179 are not permissable. The bad news is I belive its retroactive to past SR179 deductions, i.e. you owe them any past refunds back. That could be an ugly check to have to write.

    Bottom line is that this is very complicated and if you do not understand you need a pro to help make sure you do not run a foul of the IRS.

    Looking at your bio I would say you have enough land to make it work. A guy with a tractor and 2 acres is likely doomed since it would be very hard to make a profit.
    All these laws are theortically designed to promote farming, help farmers, and the economy and not to create a tax shelter.

    Fred

  6. #6
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    Default Re: New tax laws

    I THINK this a question best answered by someone that really knows what they are talking about. a very complicated subject. best handeled by you accountant or tax advisor.

  7. #7
    Veteran Member Slamfire's Avatar
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    Default Re: New tax laws

    I'm not a tax man either. However your question doesn't require one, except for eligiblity. If you make $100k and depreciate and investment of $25k you'd still have $75k of income, and you'd pay tax on that.

  8. #8
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    Default Re: New tax laws

    Saying that you do qualify as a farm then the way the tax law works is that whatever you buy up to $100k, $400k in other situations, you can take that off of your GROSS. If you have income of 100k and you buy equipment worth $37k then you would have a gross income of $63k. You would pay taxes on the $63k.

    Now depending on how your business structure is setup you can take the payments and depreciation off as well. But you have to be setup right when does get complicated.

  9. #9

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    Default Re: New tax laws

    Whenever you run into questions about tax law that are complicated, look for a retired IRS employee to do your tax returns. They seem to have the best amount of knowledge and if they make a mistake, have the best ability to have it corrected with the least amount of discomfort to the client. If you are facing a audit, find an "enrolled agent". These are people that are licensed by the IRS to represent individuals and they really know their way around the IRS..... Hopefully you will never have that need or experiance....
    35 years ago, I dated a woman that was a lead secretary to the criminal investigation division of the IRS. What I learned from her was that it is better to pay the taxes than it is to deal with the audit.

  10. #10
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    Default Re: New tax laws

    Most of the explanations have been right on target.

    To simplify, the $100,000 Section 179 deduction is only allowed against net income from trades or businesses. Fortunately SALARY is considered net income from a trade or business for this purpose. This means that theoretically you could buy a $100K tractor for the farm and deduct it all as long as the farm and other business otherwise at least broke even and you had a 100K salary.

    This is a deduction - not a credit. The amount of the deduction will reduce your taxable income on which tax is computed, so if you are in a 30% bracket it will save you $30 for each $100 of cost.

    There is also a 50% bonus depreciation for new assets, if there is anything left. The remainder after 179 and bonus is depreciated using a regular depreciation method, usually 150% declining balance for farm assets. So, you don't get to take 179 and then take depreciation on the same cost again.

    By the way, this 179 deduction is great for vehicles - trucks with loaded weights of over 6000 pounds, if you use them mostly for business.

    The 179 deduction only applies to tangible personal property used in a business or in a commercial rental operation. Real estate does not qualify.

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