Tuesday, September 28, 2010

Big Equipment Purchases Blessed in New Tax Legislation

DTN news reports a bill approved by Congress in late September revives the popular 50 percent bonus depreciation rule for new equipment that had been part of the emergency stimulus package in 2008 and 2009.

Farmers could harvest sizable tax write offs in a new small-business law, giving extra incentives for end-of-year equipment and truck purchases. The U.S. House approved the legislation Sept. 24, following Senate action earlier this fall, and President Barack Obama signed it into law Monday.

In an effort to jumpstart the economy, Congress raised the threshold on Section 179 expenses from the current limit of $250,000 to $500,000 for tax years beginning in 2010 and 2011. The terms apply to both new and used equipment.

In the past, this deduction phased out as eligible purchases exceeded $800,000, but the new threshold was raised to $2 million. With commodity prices rebounding, and crop yields relatively good, some farmers may be able to capitalize on the extra tax generosity. "Now a lot of grain can be reported as farm equipment on the tax return," said CPA Andy Biebl, a principal with LarsonAllen in Minneapolis and DTN's tax columnist.

The law also revived the popular 50 percent bonus depreciation rule for new equipment that had been part of the emergency stimulus package in 2008 and 2009, but the deal won't last long. The new legislation retroactively extends the 50 percent bonus back to qualified property acquired and placed in service since Jan. 1, 2010, but before Jan. 1, 2011. "This is supposed to be an incentive for taxpayers to buy equipment, but a lot of us can't figure out how effective that will be given that we are here in the last days of September," Biebl said. "It's a sign of the desperation out there."

New vehicles under 6,000 pounds also get a boost. The first-year deduction for a new auto will move from $3,060 to $11,060 and for a light truck from $3,160 to $11,160. Used vehicles purchased during 2010 continue to be subject to the lower caps.

Agricultural attorneys and accountants generally welcomed those new provisions, although with caveats. "Remember, many states do not couple with the federal government on the depreciation provisions," advised Roger McEowen, an Iowa State University agricultural law professor. "The restoration of bonus depreciation and the enhancement of expense method depreciation will further complicate return filing in those states" and may mean producers need to keep two sets of books.

One highly unpopular provision buried in the new tax law applies to landlords. Until now, owners of rental property operating as "passive" investors have been exempt from the requirement to issue a Form 1099 report on payments of $600 or more to service providers. Starting with payments made after 2010, if a landlord spends $600 or more for bookkeeping, painting, repairs or other services, he would be required to issue a Form 1099-MISC to both the IRS and the payee.

The new rules mean "taxpayers with land in the Conservation Reserve Program also would have to file information returns for payments made to farmers that, for example, provide mid-contract maintenance services on the land that totals $600 or more," McEowen said.

When several hundred tax practitioners attending a recent Iowa State University seminar heard the news, they gave a collective groan. "We may see a new industry pop up -- 1099 preparation," quipped Tom Lawler, a Parkersburg, Iowa attorney.

By Marcia Zarley Taylor,
DTN Executive Editor
Elizabeth Williams,
DTN Special Correspondent

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