How to maximize tax advantage on tractor purchase?

[KiotiJohn]

</font><font color="blue" class="small">( I looked at the various discussion forums and thought this BUYING forum would be appropriate since I am trying to factor the tax consequences into buying my new tractor, and did not see any other forums that would relate any better to it. I've only read the forum for a few weeks and hadn't seen any threads similar to this.)</font>
This is the right forum, but usually it's best to post a new thread of your own if it's not directly related to the thread to which you're responding. Not a big problem, and I don't think JDLaw was chiding you, just letting you know.
Check this link to a thread about sales tax: Sales Tax?!?

 

[jfdlaw]

Gugy & Fixit

I'm sorry if I sounded harsh. That wasn't my intent. This is the perfect forum for these tax questions and any question about buying a tractor.

The original question asked about income tax. Gugy made a comment regarding sales tax, which is a completely different topic. That's why I said that MY comments on sales tax were not really appropriate for this thread since it dealt with income tax, not sales tax.

Didn't mean to offend anyone.

 

[cowboydoc]

Unless I missed something he doesn't want to know about sales tax but about how you depreciate the tractor.

As far as depreciating the tractor if you are classified as business use and the tractor is 100% for business use then you can take the 100% deduction the first year. If you have the right accountant and you finance it there are also some double depreciation things you can do as well. I have taken full advantage of this over the last couple years. We have basically paid half price for equipment. In two years we can sell the equipment pocket the price of the equipment and go out and buy new equipment again. It's a heck of a deal if you need alot of high priced equipment.

 

[KiotiJohn]

Doc, I meant to respond to Gugy who mentioned sales tax, not fixit. My bad. John

 

[kybota]

</font><font color="blueclass=small">( Unless I missed something he doesn't want to know about sales tax but about how you depreciate the tractor.

As far as depreciating the tractor if you are classified as business use and the tractor is 100% for business use then you can take the 100% deduction the first year. If you have the right accountant and you finance it there are also some double depreciation things you can do as well. I have taken full advantage of this over the last couple years. We have basically paid half price for equipment. In two years we can sell the equipment pocket the price of the equipment and go out and buy new equipment again. It's a heck of a deal if you need alot of high priced equipment. )</font>

I think this may be what the dealer was referring to when he mentioned it to me, but that was about three months ago and didn't know about any imminent deadlines to make the purchase to qualify. I sure hope there is more time as I would rather wait until I moved to purchase the tractor.

I'll see if I can find the bulletin that mentioned the deadline and pass it along to this forum. Maybe someone can make better sense of my inquiry then. Thank you for the help.

Didn't find the exact link I first saw this, but I think these are addressing the same thing:

tax link 1

tax link 2

next tax link

 

[kybota]

I may have found an answer and it looks like the deadline for this accelarated depreciation was extend a few months to Jan. 1, 2005.

Obviously, I think I need to now talk with a tax advisor to keep from getting into any trouble (i.e., if my small farm operations will qualify). But the extra time will be nice (and extra 20% to boot).

Here is the best discussion I've found about this:
New 50 percent depreciation allowance

Hope some of you can put this to use as well.

 

[Alan L.]

I don't have every date memorized, but I don't believe the 50% bonus depreciation expires before 2005. A few concepts:

1. You can depreciate only the business portion.

2. Under section 179 you can write off up to $100K, reduced by percentage of personal use. Business use must be more than 50% to utilize 179. You also must have either business net income or salary to offset the deduction against, otherwise it carrys over. Can't use section 179 in a business that is residential rental (like a rent house). If you trade something in, you can only take section 179 on the boot paid, which includes financing (you don't have to pay cash).

3. Bonus depreciation is 50%, its automatic. If you don't want it, you have to elect out of it.

4. You can depreciate the cost of one time. Whatever depreciation or section 179 deduction you take reduces basis, so if you sell it, you have to report the gain attributable to the reduction as ordinary income. For instance if you pay $25K for a tractor and write it off, then sell it for $20K, you must report $20 of ordinary income. If your business use drops you have to recapture part of a section 179 deduction you took previously.

5. It would be pretty hard to justify a tractor for and ebay "hobby business" or one rent house.

 

[cowboydoc]

<font color="green"> You can depreciate the cost of one time. Whatever depreciation or section 179 deduction you take reduces basis, so if you sell it, you have to report the gain attributable to the reduction as ordinary income. For instance if you pay $25K for a tractor and write it off, then sell it for $20K, you must report $20 of ordinary income. If your business use drops you have to recapture part of a section 179 deduction you took previously. </font>

As I'm sure you know Alan this is the straightforward approach. But with corporation and personal there are numerous ways around this that are all completely legal. The nice thing about the tax system is that almost all of the people in govt. are looking for loopholes as well. They very well may close one loophole with legislation but they will open another one to do the same thing. Nothing is illegal you just have to have a savvy accountant to keep track of how to do things legally.

 

[OrangeGuy]

Pasturing a few calves may get your farm enterprise declared an agricultural endeavor. However, you will only be able to offset depreciation against income earned by your farm enterprise. Unless someone is going to pay you a fortune to pasture these calves, you will not have enough farm income to use depreciation to reduce taxes. You gotta make money farming before you can use farm tractor depreciation.

OrangeGuy

 

[cowboydoc]

<font color="green">Unless someone is going to pay you a fortune to pasture these calves, you will not have enough farm income to use depreciation to reduce taxes. </font>

I agree totally with you. I am constantly amazed at how many people think you just raise a few crops and graze a few cows and you are an ag exempt business able to write off tens of thousands of dollars against a few hundred or a few thousand dollars in income. /forums/images/graemlins/confused.gif It's kind of like going out and buying a new car and giving a few friends a ride to the airport and trying to say you have a taxi business and claim a 100% deduction for the car. /forums/images/graemlins/shocked.gif