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 The Jobs and Growth Tax Relief Reconciliation Act signed into law by President Bush May 28 will mean $4
billion in tax relief for farmers and ranchers this year,
according to an analysis by USDA’s Office of the Chief
Economist announced by Secretary of Agriculture Ann Veneman.
Veneman said the bill would benefit more than 86 percent of
all farm households, with an average 16 percent tax reduction
in 2003.
The savings include
$2.3 billion from the acceleration of reductions in income-tax
rates, marriage penalty relief and the increased child credit,
and $1 billion from increasing the bonus first-year
depreciation and the amount of capital investment that can be
expensed under Section 179 from $25,000 to $100,000.
The analysis also
estimates that farmers will save $700 million from the reduced
tax rate on dividends and $500 million from the reduced tax
rate on capital gains. Additional savings also will come from
the alternative minimum tax exemption increase of $9,000 for
married taxpayers and $4,500 for single taxpayers.
Reduction in the
dividend and capital gains tax rate to 15 percent (5 percent
for taxpayers in the 15 percent or lower income tax bracket)
will benefit one-third of all farm households and more than
half of all households with a farmer over the age of 65, with
an average savings of $1,200.
Tax Planning Vital
in Light
of Changes
1st FCS clients will
benefit from many of the provisions of the new tax law. A
visit to your tax advisor this summer will be time well spent
to gain a better understanding of the tax law changes and the
financial implications on your operation.
The effects of the tax
code changes are particularly noteworthy when purchasing new
farm machinery and other qualifying assets. Changes in the
code include an increase in the bonus depreciation provision
from 30 percent to 50 percent for qualifying assets acquired
after May 5, 2003 and before January 1, 2005, as well as, an
increase in Section 179 expensing. The cumulative effect of
these two changes will be material for many producers.
For example, assume a
producer purchases a new combine for $210,000. The producer
could elect to take a Section 179 expense of up to $100,000
the year the combine is placed in service. Additionally, bonus
depreciation could then be taken for 50 percent of the portion
not expensed (50% of $110,000 = $55,000). The balance of the
asset cost -- in this case $55,000 -- would then be
depreciated using your regular depreciation method over seven
years.
In this example, the
change in the deduction is significant -- increase of $75,000
in Section 179 expense plus increase in bonus depreciation of
$22,000 for a total increase of $97,000 in taxable expense
deductible in the first year.
To Depreciate, or Not to
Depreciate?
While the cumulative
effect of these changes has the potential to significantly
lower federal income tax liability as seen above, there are
several factors that producers should keep in mind when trying
to decide whether or not to exercise the Section 179 and bonus
depreciation provisions.
Section 179
depreciation may be taken on qualifying new and used assets, while
bonus depreciation may only be taken on qualifying new assets.
When considering the
purchase of a new asset, producers have the following options:
- Only Section 179 (up to
$100,000),
- Only bonus depreciation
either at the new rate of 50 percent or the standard 30
percent,
- Both Section 179 and bonus
depreciation (at either 50 percent or 30 percent), or
- Regular straight-line
depreciation.
Electing the Section
179 and/or bonus depreciation provisions may reduce or
eliminate other credits, deductions and exemptions for which
producers may qualify.
We believe that
machine sheds and pole buildings continue to be ineligible for
Section 179 expensing. However, qualifying farm buildings may
be eligible for 20-year depreciable life treatment, which may
result in the asset being eligible for bonus depreciation.
Leasing as a Tax
Management Option
The new bill, in
effect, "front loads" deductible expenses. The amount of
deductible expense carried forward to offset income in future
years will be much less than in the past. Producers who desire
to spread the tax benefits over future years may want to
consider lease financing.
With a 1st FCS tax
lease part of the bonus depreciation benefit is passed along
in the form of a lower lease rate. The lease payment is
generally tax deductible and may be structured to provide
consistent expensing over the life of the lease.
Bottom line, if you are looking at purchasing any qualified
assets you should consult with your tax advisor to determine
how to maximize your tax benefits. In addition, the types of
financing you choose should also be considered for your
particular situation. And as always, it’s a good idea to
discuss any asset purchase with your 1st FCS financial
professional to obtain the loan or lease that best meets your
financial needs. |
