I am acquiring a well, pump and pivot system, and am wondering how to best use this for our taxes. I bought it but it will be put into use in 2017. Does it qualify for the $500,000 Sec. 179 deduction?
There are lots of issues with this question, the first of which is that you actually have two separate assets for depreciation purposes. The pivot system falls into the seven-year farm machinery and equipment category, whereas the well system is a 15-year asset. Your costs need to be categorized to those two separate systems, assuming that all expenditures are not written off using one of the two first-year depreciation deductions.
Assuming that all of the equipment you have purchased is new, these assets may qualify for both the $500,000 Section 179 first-year depreciation deduction and the 50% bonus depreciation, applied in that order (50% bonus requires that the asset be new rather than used).
A key rule for all depreciation deductions (Section 179, 50% bonus and starting the seven- or 15-year depreciation on the balance) is that the deductions can only be commenced when the property is placed in service. The concept of "placed in service" requires that the asset be in the state of readiness or condition of operation, although it does not need to be actively watering crops. Thus, if your irrigation system is operational in December, the deductions could be claimed in 2016; if pumps are not installed and electricity brought in until 2017, all depreciation deductions commence in the later year when the system is operational.
Finally, your question does not indicate whether you are an active farmer or a landlord/lessor. If the latter, there is a barrier to the Section 179 deduction. Property leased to others is not eligible for Section 179, unless the term of the lease is less than 50% of the asset class life (10 years for the pivot system, so lease must be less than five years). Further, during the first 12 months of the lease, the deductions incurred by the landlord for expenses other than taxes, interest and depreciation must exceed 15% of the rental income produced by the property. Thus, as landlord, you need to incur utilities, insurance and other expenses related to the irrigation system that exceed 15% of the rental income.
Recognize that the Sec. 179 deduction and 50% bonus are discretionary. If eligible, you can claim any amount of Sec. 179 on the well and pivot system. And you may elect out of 50% bonus on either your seven-year pivot system property or your 15-year well property or both. Thus, as your tax return is prepared, your tax adviser has the ability to fine-tune the amount of depreciation claimed in the first year so as to use the deductions against upper-bracket income. This saves the balance for future years through normal seven-year and 15-year cost recovery. The art of depreciation, of course, is to get the deductions against the highest bracket income possible.
I just read the electronic release of your February Progressive Farmer column on Employer ACA Relief. I had a 105 Medical Reimbursement Plan before the ACA took it away. Can I take that document and use it again beginning in 2017?
Your former Sec. 105 medical reimbursement plan is going to generally qualify under the new small employer reimbursement arrangement recently authorized by Congress, but it will need several edits (the technical requirements are in IRC Sec. 9831(d)). First, the nondiscrimination language needs to be modified. The new arrangement requires a short 90-day waiting period before a new employee must be enrolled in the 105 plan (formerly, that was up to a three-year waiting period). The other rules regarding excluding those under age 25, part-time employees and seasonal workers are all the same.
Also, the maximum amount you can reimburse is now limited. If you are providing employee-only reimbursements, the cap is $4,950 per employee per year. If you are reimbursing family expenses, it can be up to $10,000 per employee per year.
Another minor point is that your plan should indicate it is adopted under IRC Sec. 9831(d) as a qualified small employer health reimbursement arrangement. The present document probably refers to Sec. 105.
Finally, there must be a written notice to each employee indicating the amount of the employee's permitted benefit for the year, a statement that the employee must provide the amount of the benefit to any health insurance exchange in which the employee applies for an advance premium assistance tax credit, and a statement that the employee will have taxable income for the reimbursements if the employee does not maintain ACA-level health insurance (but if the employee has health insurance, the reimbursements are tax-free).
While these plans can be self-administered, we advise our small employers to use a benefit administration firm. Unless you have an HR person who can devote time and attention to all of the details, it is generally most efficient to outsource all of the above to fringe benefit firms that specialize in these types of plans. They provide all of the paperwork, assist with employee claims, provide the employee notices, etc. for a very reasonable fee.
Editor's Note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis with more than 40 years' experience in ag taxation, including as a trainer for the American Institute of CPAs and other technical seminars. To pose questions for future tax columns, e-mail AskAndy@dtn.com.
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