In 2010, to help combat a tough economy, two bills were passed to help farmers and producers invest in new equipment by temporarily increasing the expense write-off. The Small Business Jobs Act of 2010 and the 2010 Tax Relief and Job Creation Acts increase the ability of businesses to write off the purchase of equipment in the year the purchase is made, raising the deduction amounts for 2010, 2011, and 2012. After December 31, 2012, the opportunity to take advantage of these increased deductions will expire, or "sunset," and the expense write-offs will return to original rates.
How does this work? For the remainder of 2011, businesses can write off up to $500,000 in equipment purchases, but the equipment must be placed in service prior to the end of the year to qualify. If equipment purchases for 2011 exceed $2,000,000, the amount that can be written off ($500,000) is reduced by the amount in excess of $2,000,000. For equipment purchases in 2011, the full amount of the equipment up to $500,000 can be distributed in any manner between equipment and the remaining amount will go into a depreciation schedule. Beginning in 2012, the expense that can be written off reduces to $125,000, and still requires that the equipment be placed in service by the end of calendar year 2012. The maximum threshold on equipment purchases to obtain the full write off is $500,000.
This may be a great opportunity for businesses to reduce their tax exposure in 2011 or 2012 by expensing most or all of your equipment purchases instead of following the traditional depreciation schedules. A word of caution: you might consider purchasing such equipment in accordance with your farm equipment purchasing plans since expensing the full amount of such purchases in the year of purchase means that you will not be able to take any depreciation on the equipment in subsequent years.
Don’t let the clock run out if you’re looking to purchase new farm equipment. Be sure to consider your financial situation and examine your future equipment needs before purchasing to see if buying this year or next year could help your bottom line by decreasing your tax burden.
After 2012, the amount that can be written off in the year of purchase will fall back to a $25,000 write off for purchases up to $200,000, an amount that falls far short for many equipment investments necessary for operation in this industry.
On the horizon: at press, several bills have been introduced in the Senate and House of Representatives that would eliminate the current sunset provisions and permanently raise both the amount that can be written off as deductions in the year of the purchase as well as the threshold at which the deduction begins to decrease.
A bill with similar implications was also just recently announced. Under the "Grow it Here, Make it Here" initiative to advance Michigan's emerging bio-based manufacturing industry, U.S. Senator Debbie Stabenow, who is Chairwoman of the Senate Committee on Agriculture, has proposed a 30% tax cut for new, expanded or re-equipped bio-manufacturing projects. If you're in favor of these sorts of tax cuts, we would encourage you to contact your representatives in Congress and voice your opinion.
Co-authored with Maria Knirk, student, Michigan State University - College of Law© 2013 Varnum LLP