As a result, the advantages of a new tax law couldn’t have come at a better time for producers with the means and the desire to reinvest in the equipment infrastructure of their operations, analysts say.
In May, Congress passed and President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003. 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 Jan. 1, 2005.
“Depending on their individual financial situations, this new law could be a win-win for farmers,” says Thomas Jarrett, director of taxes, John Deere. “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.”
John Deere has developed an easy-to-use, Microsoft® Excel-based calculator – available on JohnDeereAg.com – that producers can use to help determine the impact of the new depreciation allowance on equipment purchases in their operations.
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 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.
Accelerated Depreciation Illustration
Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003
Sample Machine: 8420 MFWD Tractor Depreciation Life (Years): 7
Machine’s Adjusted Basis: $160,000 Year Purchased: 2003
Declining Balance Method: 150 Accounting Convention: Mid-year
Normal Depreciation GTRRA 2003 Potential Tax
Schedule Provisions Savings1
2003 $17,143 11% $88,571 55% $25,000
2004 $30,612 19% $15,306 10% ($5,357)
2005 $24,052 15% $12,026 8% ($4,209)
2006 $19,598 12% $9,799 6% ($3,430)
2007 $19,598 12% $9,799 6% ($3,430)
2008 $19,598 12% $9,799 6% ($3,430)
2009 $19,598 12% $9,799 6% ($3,430)
2010 $9,799 6% $4,900 3% ($1,715)
Please Note: This example is provided for illustrative purposes only and is not intended to replace the counsel of a professional tax advisor. Each individual’s tax situation is different and will be impacted by a number of different factors. Neither John Deere nor your local John Deere dealer warrants this illustration to be entirely applicable in any specific producer’s individual circumstance.
1This assumes that the producer has adequate income to take advantage of the entire special depreciation provided for by the 2003 JGTRRA, the producer does not use the special 179 Expense Deduction, and that the entire amount of the net depreciation change is used to offset/enhance income that will be taxed at the 35 percent marginal tax rate.