Section 179 Can Create a Farm Loss (In Certain Cases)

We got the following question from one of our readers:

“Is it true you can only deduct Section 179 in the amount of your farm income remaining after other deductions? In other words you can not have a loss because of 179 depreciation? If the Section 179 deduction is more can you carry it over to next year?”

For Section 179, there is an overall taxable income limitation for deducting the 179 expense.  For an individual, this limit is based upon your overall global business income including the following:

  • Wages and salaries for the taxpayer and/or spouse,
  • Ordinary proprietorship (schedule C or F), partnership, or S corporation net income (or loss),
  • Section 1231 gains (or losses) from a trade or business (selling farm machinery for more than cost),
  • Depreciation recapture from the sale of farm or other business equipment.

All of these items are added together and this “taxable income” limitation will determine your maximum Section 179 deduction.

For example, assume a farmer has schedule F net farm income before Section 179 of $200,000.  He has $100,000 of wages earned from outside the farm.  He purchased $500,000 of equipment during the year.  He is allowed to deduct up to $300,000 of equipment under Section 179 on his schedule F resulting in a farm loss of $100,000 which is offset by his wages of $100,000.  In most cases, he would not want to take that much, but he is allowed to deduct that amount.

Without the wages, he would have been limited to a $200,000 deduction amount.

If the amount of Section 179 elected exceeds this taxable income limitation, then the excess can be carried forward and used in the next year (subject to these limitations, etc.).   As discussed in previous posts, if you carry too much forward, you may permanently lose the deduction.  You do not want that to happen.

As usual, you should discuss this with your tax advisor.  We have seen many returns with the wrong amount of Section 179.  Make sure yours is correct.

Paul Neiffer, CPA

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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2 Comments

  • January 11, 2013 at 6:42 am

    Tax Roundup, 1/11/2013: « Roth & Company, P.C

    […] Paul Neiffer, Section 179 Can Create a Farm Loss (In Certain Cases) […]

  • January 14, 2013 at 10:52 am

    John Oswald

    Hello Mr Neiffer,
    Thank-you for clarifying so many tax questions in your blog.
    I purchased a used grape harvester last year (2012). Actually, I am lease-purchasing it over 5 yr from Capital Farm Credit.
    I think that the IRS does not count this as an actual lease but rather as a purchase, right?
    How then do I expense it out – I paid ~$50,000 in 2012 of the total ~$220,000 price.
    Would 2012’s depreciation start with the total price (~$220,000) or just what I paid on the lease in 2012?

    For the 2012 tax year, I won’t need to depreciate any more than what I actually paid so far – how would I roll over some to 2013?
    Would using the 50% bonus depreciation be better?

    thanks again

    John Oswald
    Oswald Vineyard
    Brownfield, TX

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