You can use these rates to reimburse your employees for their business miles and or deduct businessuse of your personal vehicles on the farm.

Here is the announcement.

“If I purchase and take delivery of a tractor in December 2011 but do not want any of the depreciation until 2012 can I still get the section 179 and bonus depreciation in 2012?”

In order to depreciate equipment such as this tractor in 2011, the farmer must both purchase the tractor (either for cash or financing it) and place the tractor in service.  Generally at year-end, the tractor needs to be delivered to the farm and available for use on the farm.  The farmer does not have to actually use the tractor in the field before year-end, but it must be available for that use.

If the farmer meets both of these tests, then the tractor is depreciated in 2011 either using bonus depreciation, if new, or using Section 179 and regular depreciation on the remainder, if used.

Now, if this farmer does not want to depreciate it in 2011, then he can purchase the tractor, but not place it in service.  He may simply have the tractor delivered to the farm after year-end and this would make it eligible for bonus depreciation and Section 179 in 2012.

However, the farmer needs to understand that bonus depreciation in 2012 is only 50% not 100%, and Section 179 is only available on $139,000 of assets, not the $500,000 available in 2012.  Now, these numbers may change and go back to the 2011 amounts, but this is not law yet.

If more than $500,000 of Section 179 expense flows through to the farmer, then this excess amount is permanently lost as a deduction.  In this case, the farmer should have one or more of the entities look at amending their tax return to take a lower amount of Section 179 or if it new equipment, the 100% bonus depreciation rules would apply and it would result in the same deduction to the entity.

Another trap to watch out for is if the farmer has multiple C corporations that he controls, the Section 179 rules require the $500,000 limitation to be allocated among all of the C corporations that he controls.  This will result in only $500,000 being able to be deducted among all the C corporations.

If you think these limitations may apply to you, make sure to review it with your tax advisor.  The worst thing that can happen from a tax standpoint is to permanently lose a tax deduction that can be prevented.

I know that as a child with my two siblings, we decided to go sledding down our “steep hill” by our house.  It took us about 15 minutes to walk up to the top of the hill.  We then put the sled down and all three of us got on it and away we went.  It only took about 100 feet for all three of us to get knock off the sled since it was so steep, we could not control it.

Another steep hill we had, the combine would start up the sidehill to get to the top.  At the bottom, we were cutting a full swath and by the time we got halfway up the hill, the combine had slid half way down the swath area and by the time we got to the top of the hill, we were lucky to be cutting a 5 foot section.

We had Caterpillar crawler tractors then and I remember riding with my dad around 10 years old and we would be coming up this same hill pulling the plow and as we got toward the top all you saw was blue sky and just as you crested the hill, the crawler tractor would continue to climb up into the air and then gravity would take over and the front end of the crawler would plunge back to earth.  Now, that was what I called a great amusement ride.

On a slightly more tragic note, we had purchased a brand new International 453 combine.  This was my second year of driving the combine during harvest and normally I would have been operating it this day, but had spent the night a friend’s house and my dad said he would drive it that morning.  We were cutting a field with moderately steep hills, but not too bad.  My father was going up hill when the transmission gears blew up and back then you spent most of the time standing up while driving.   Once the gears went, the combine immediately started to go backwards down the hill.  This caused my dad to grab the steering wheel and turn the combine into the hill which caused it to tip over pinning my father inside of the cab.

He was pinned inside the cab for over three hours while the emergency people worked on getting him out.  The gruesome part was that the combine’s throttle lever went through his leg pinning him inside of the cab.  He had use a hacksaw to cut himself out of the cab.

But being the tough German he was, he was back helping me combine the next summer.

There are many YouTube videos out there of combining on steep hills, but they do not really show you how steep these hills are.

Here is a sample of one of them.

“When does depreciation recapture on equipment kick in? For example a 20 year old tractor fully depreciated sells for $30,000 cash. It cost $50,000 new. Is any of the $30,000 considered a capital gain?”

This is a fairly common transaction for many farmers during their farm career.  Let’s take the example that was part of the question and break it down.

When, the tractor is purchased for $50,000, this is the basis that is used for depreciation purposes.  In this case, the tractor was fully depreciated and sold for $30,000.  Depreciation is recaptured up to the amount of “total depreciation taken”.  So, in this case, all of the gain is depreciation recapture since the sales price of $30,000 is less than the total depreciation of $50,000.  Another way to look at it is if the the sales price is less than original cost, then all of the gain will always be depreciation recapture.

If the tractor had sold for $70,000, then there would have been depreciation recapture of $50,000 and Section 1231 gain of $20,000.  This gain is usually taxed as long-term capital gains, however, if during the last five years, you had accumulated Section 1231 losses, then part of this gain would be taxed as ordinary income.

In the example, the farmer sold the tractor for cash.  Let’s assume the farmer sold the tractor to a neighbor for $5,000 down and the remainder on a five year note.  Since all of the gain is depreciation recapture, the full gain on $30,000 is reported in the year of sale, even though the farmer only got $5,000 of cash.

There is one exception to this rule that may help farmers some.  Any unique component that can be separately determined to have commenced construction after September 8, 2010 and placed in service before the end of this year may qualify for the 100% bonus depreciation.  A unique component is any material part of the construction that can be identifiable by both the start of construction and its costs.

For example, if a farmer constructs a machine shed that starts before September 9, 2010, this building can only be depreciated using 50% bonus depreciation.  However, if the machine shop has an unique door system that is started after September 8, 2010, then this door can be deprecated using 100% bonus depreciation.  Another example of a component that may qualify is a feed handling system or watering system installed in a hog barn.

The farmer must elect on the tax return to use this method of depreciation on these components, so it is very important to review this with your tax advisor during construction and when preparing your tax return.

For example, if a farmer started to build a new machine shop in late 2010 and placed it in service in May, 2011, they could deduct 100% of this cost on the 2011 tax return.  Most tax advisors were under the assumption that this 100% bonus depreciation would apply on any new building placed in service between these dates.

However, the IRS has thrown us a curve ball in that their intrepatation is that both the contruction must commence and be placed in service during these time periods.  Therefore, if in the above case, the farmer started the construction before September 9, 2010, then they can only deduct 50% of the new building as bonus depreciation.  The beginning of construction is defined “as when physical work of a significant nature begins”.

If this applies to your operation and you deducted 100% of the new building on your 2010 tax return, you will need to review with your tax advisor to see if an amended tax return is required.

Agco’s net income was down about 90 percent.  The company blamed their earnings short fall on two main items:

1.  Lower commodity prices, and

2. Tight credit

The company indicated softening demand in North America and Europe, weakness in Russia and Eastern Europe and stabilizing demand in South America.  Agco makes equipment under the Massey Ferguson, Challenger, Fendt and Vaitra brand names.  Sales were down almost 33 percent, therefore a reduction in net income of about 90% was actually better than most analysts expected.

More numbers are available here.

Lindsay, the maker of irrigation systems indicated that their profit for the quarter dropped 81 percent on a 50 percent drop in sales.  Both earnings and sales were substantially less than what the analysts expected.  Rick Parod, the company’s CEO said farmers continued to remain cautious about making investments in capital goods.

Further information can be found here.

I will try to update more of these publicly traded companies each quarter as their earnings comes out.  You can obtain good trend information from reading their quarterly reports or analysis.

However, for 2009, there are many cases where this may not be a good idea.  The recent tax law extended the Section 179 deduction for equipment to $125,000 for 2009.  Therefore, if your total equipment purchases for 2009 will be less than $125,000, I would suggest making sure that non of your equipment that you want to trade in qualifies for the like-kind exchange rules and thus, they will be taxable sales.

Most farmers are probably asking why would we ever want to report a gain-on-sale by selling equipment.  The reason is that the gain on sale from selling equipment is not subject to self-employment taxes and the Section 179 deduction on your farm equipment will reduce your self-employment taxes.  Thus, reporting gain on sale of equipment can result in a tax savings of about 15% on the sale of your equipment.

As an example, say you have an old combine worth $50,000 that you have depreciated to zero.  You want to buy a newer combine for $125,000.  If you traded in this combine, you would be able to take section 179 on the net difference of $75,000.  This would reduce your taxable and self-employment income by $75,000.  However, if you sell the combine for $50,000, you would report a gain of $50,000 which is not subject to self-employment tax and you would be able to deduct the entire combine purchase price of $125,000 which would reduce your self-employment income.  The net result is a potential tax savings of about $11,000 under this scenario.  This assumes you are not over the taxable wage base.

If you have equipment needs this year, please review them with your tax advisor to make sure you take advantage of these rules if they apply to you.

The Iowa State University Extension Department has a very good article on how to structure these joint operations.  Even if the ownership percentages are different from the acres that are farmed, the accounting for these differences can be done effeciently and timely.

For example, in the case of combine joint ownership, I believe that you should perform an analysis of the total number of hours that a combine should operate each year to get the best rate of fixed cost amortization.  If you determine that this number is about 300 hours and you can average 10 acres per hour, this would result in the optimum acres of 3,000.  You would try to find another partner or partners to get a total of 3,000 acres.  This would allow you to minimize your fixed costs in operating a combine. 

If you farmed 1,000 acres of beans and corn and owned a combine costing $150,000 for five years and then sold it for $50,000 after the five years, you cost of ownership of this machine is $20,000 per year.  If you can find another farmer that has 2,000 acres, you would reduce your annual ownership cost from $20,000 by 2/3 to $6,667 or a savings over five years of about $67,000.  Also, the other farmer may be able to provide additional services such as repair experience, trucks, dump out wagons, etc. that you do not have now.

Other factors need to be reviewed such as how close and compatible your farm partner(s) are.  The age of the machinery, the amount of other equipment to support the jointly-owned machinery and who would operate and maintain the equipment.