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You Can Pick & Choose on Bonus Depreciation!

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January 20th, 2011

We had a reader ask the following question:

“I’m thinking of putting up a farm shop and storage building this year (2011). Can I take the bonus depreciation on only half of the cost of the building and depreciate the remaining amount over the 20 year period?”

Now based on my heading, you are probably assuming that this farmer can do this.  The answer, however, is no.  On all assets of the same asset type and class such as all new farm buildings put in service during the year, you must either take 100% bonus depreciation on ALL assets in this class type OR elect to take normal depreciation on all of the assets in that class.

However, the option that you can choose is to take bonus depreciation on one type of assets such as farm buildings and elect not to take it on another class such as farm equipment.  by making this election, you can more optimize your farm taxable income to reflect your best planning opportunities.

Here is an example of how this might work.  Let say the farmer puts in a new farm shop that costs $250,000 and buys new farm equipment that costs $300,000.  The farm normally makes about $350,000 from operations after other depreciation.  The farmer knows that if they take the full bonus depreciation on both assets, then the taxable income for the year will be a loss of around $150,000.  The farmer does not want to show that much loss, so they make the election to only take bonus depreciation on the farm shop of $250,000 and depreciate the farm equipment over 7 years.  This gets their net farm income down to about $50,000 which might be more preferable to them.

You have several options on how you take the bonus depreciation and remember that farm equipment is still available for the Section 179 deduction, so even if you elect out of bonus depreciation, you still may be able to optimize your farm income by using Section 179.

My normal preference would be to take bonus depreciation on all 20 year property such as farm buildings in 2011 since you can get an immediate deduction for these assets, however, every farm situation is different, so you must review this with your tax advisor.

Paul Neiffer

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation. Leave a comment for Paul. If you would like to leave a comment for Paul, follow the link above, however, please make sure to include your email address so that he can reply to your comment (your email address will not automatically show up).

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3 Comments

  • January 21, 2011 at 6:19 am

    Roth & Company, P.C.

    Picking and choosing bonus depreciation deductions…

    Sometimes taxpayers want to take bonus depreciation on some assets, but not others. You have to do it by “asset……

  • January 23, 2011 at 9:14 am

    Ray, EA

    The biggest problem is that people do not think. Let us take the biggest deduction we can this year let next year take care of itself. This is often a bad choice. The other problem is that these rules take away the choice by the taxpayer. We must choose by class or even the whole asset. The only way around this is elect out and use 179 if possible. Think first, then choose.

  • January 30, 2011 at 12:48 pm

    Joseph J. Vogel

    Quick question. I am a land owner and rent all my land on cash rents. I am bilding a Morton Building with a living area attached and wondered if this qualifies for the 100% Bonus deprection since I do not have material participation in the farming. Two accountants told me it does and my accountant says it does not. I thought the only test was that it is a 20 year asset.

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