With Andy Biebl's retirement, I wanted to take a quick moment to introduce myself. My name is Rod Mauszycki. I'm a principal at CliftonLarsonAllen and my focus is on Agribusiness taxation. Although I have big shoes to fill, I hope you find my articles as insightful as Andy's were.
Today I'd like to discuss the changes to depreciation. As you may know, in 2017 you could take up to $510,000 of Section 179 (subject to phase out) on new and used equipment, and 50% bonus depreciation on new equipment. The asset must be placed in service by the end of the tax year.
The Tax Cuts and Jobs Act significantly changed how agribusiness looks at depreciation. Starting with Section 179, the new legislation increased expensing limits to $1 million with the phase-out starting at 2.5 million. It also increased the property eligible for Section 179 to include property used predominantly to furnish lodging, roofs, HVAC, and fire/security systems. One benefit in using Section 179 is the ability to amend and revoke during the period open under the statute of limitations.
Bonus deprecation was one of the few items in the new law that applies retroactively. Bonus depreciation will increase to 100% for property acquired and placed into service after Sept. 27, 2017. Unlike before, bonus now applies to both new and used property. However, used property that was acquired from related parties or a decedent will not be eligible for bonus depreciation. Bonus will be phased out at 20% increments starting in 2023.
Under the new law, annual depreciation limits on passenger autos increase significantly. The first year is $10,000, second year is $16,000, the third year is $9,600, and $5,760 thereafter until fully depreciated. However, if the auto weighs less than 6,000 pounds, the deduction is limited to the lesser of the amounts above or depreciation that would have been computed under normal depreciation. This may result in unforeseen consequences so the IRS has put in place a safe harbor. If the auto weighs more than 6,000 pounds, you can fully depreciate using bonus depreciation.
Farm depreciable lives have been shortened under the Act. Prior, farm equipment typically had a seven-year life. Under the Act, new farm equipment placed in service after Dec. 31, 2017 will have a five-year life. Used farm equipment will continue to have a seven-year life. In addition, 200% declining balance method becomes the default. However, for 15- or 20-year property or upon election, 150% declining balance is still available.
One interesting retirement planning technique that opens up due to the changes in depreciation is the expanded use of Charitable Remainder Trusts (CRT) upon retirement from farming. Using Section 179 limits the ability to contribute assets to a CRT without tax consequences. A farmer could use the expanded bonus depreciation, instead of Section 179 to avoid the adverse tax consequences. This could supersize their CRT and defer additional income for two to 20 years.
Editor's Note: Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in Minneapolis, Minnesota. Send questions to firstname.lastname@example.org
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