Budgeting

Depreciation of Farm Assets under the 2017 Tax Law

Chris Zoller, Extension Educator

The Tax Cuts and Jobs Act (TCJA) revised some differences between farm and non-farm assets and added other depreciation rules that will have a significant impact when calculating net farm income.

Revised Recovery Period for Farm Machinery & Equipment

Under the TCJA, new farm equipment and machinery placed in service after December 31, 2017, is classified as 5-year MACRS property. Previously, machinery and equipment was classified as 7-year MACRS property. These assets must be used in a farming business. Equipment used in contract harvesting of a crop by another tax payer is not included in the business of farming.

Used equipment is still classified as 7-year MACRS property. The Alternative Depreciation System (ADS) for all farm machinery and equipment, new and used, is 10 years. Grain bins and fences are still 7-year MACRS property with a 10-year ADS life.

Farm Equipment Purchase Example:

Bill Brown purchased a new combine on September 28, 2017. In May 2018, he purchased a new tractor and used tillage tool. In August 2018, Bill constructed a new fence and in September he constructed a new grain bin. These assets are MACRS recovery classes:

New combine (2017)      7-year

New tractor (2018)         5-year

Used tillage tool               7-year

Fence (2018)                    7-year

Grain bin (2018)             7-year

New Rules for Depreciation Methods

Assets placed in service after December 31, 2017, have depreciation rates increased to 200% Declining Balance (DB) for those farm assets in the 3, 5, 7, and 10-year MACRS recovery classes. Assets in the 15 and 20-year MACRS recovery classes are still limited to a maximum of 150% DB. Residential rental property and nonresidential real property continue to be limited to Straight Line (SL) depreciation.

Farm Equipment Depreciation Example:

Bill Brown paid $430,000 in 2017 for the new combine. He elected out of bonus depreciation and did not elect any Section 179 expense deduction. The half-year convention applies. Bill depreciates the combine over a 7-year MACRS recovery class using the 150% DB method. His depreciation is:

[($430,000/7) x 0.5 x 150%] = $46,071

What is the difference if Bill waited until 2018 to make the combine purchase?

[($430,000/5) x 200%) = $86,000

$86,000 – $46,071 = $39,929 more than if purchased in 2017

Excess Depreciation

The increase in the rate of depreciation, combined with the shorter MACRS recovery class for new farm equipment and machinery, may generate more depreciation than needed. Taxpayers may choose to use the Straight Line (SL) method of depreciation and may also elect to use the 150% method. Both elections are made on a class-by-class basis each year. To further reduce the amount of depreciation, you may elect to use the ADS, which calculates depreciation using the SL method and lengthens the recovery period.

Resources

For additional information about this topic, contact your tax advisor or visit: https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act.

Market Facilitation Program

On August 30, 2018, the U.S. Department of Agriculture (USDA) announced its Trade Mitigation Package in response to unjustified retaliation surrounding the U.S. agricultural industry.

The Trump administration chose to employ a safeguard for America’s producers who have been negatively impacted. Thus, implementing a 3-pronged program that offers up to $12 billion to help subsidize farmers and stimulate the agricultural economy as a result of lost export sales, diminishing markets, and lower commodity prices.

The short-term package is broken down into three parts, including the Market Facilitation Program (MFP), the Food Purchase and Distribution Program, and the Agricultural Trade Promotion Program.

The following information is from Ben Brown & Haylee Zwick:

Additional Tips:

  • Acreage reports for crop commodities must be on file at local FSA office for payment eligibility
  • Crops grown for seed are currently not eligible
  • Dairy producers not currently enrolled in MPP are still eligible for payments and will follow MPP rules for new dairy operations and complete CCC-781 to establish production history
  • Producers who farm in multiple counties should apply in only their control county
  • Examples of production evidence include receipts of sale, income ledgers, custom harvesting invoices, truck scale tickets, and breeding, inventory, or vet records
  • Payment Calculation Example (Soybeans) (10,000 bu. x 50%) x $1.65 = $8,250

 

Ohio Corn, Soybean and Wheat Enterprise Budgets Projected Returns for 2018

by: Barry Ward, Leader, Production Business Management, Ohio State University Extension

Production costs for Ohio field crops are forecast to be largely unchanged from last year with slightly higher fuel, fertilizer and interest expenses that will increase total costs for some growers. Variable costs for corn in Ohio for 2018 are projected to range from $359 to $452 per acre depending on land productivity.

Variable costs for 2018 Ohio soybeans are projected to range from $210 to $231 per acre. Wheat variable expenses for 2018 are projected to range from $179 to $219 per acre.

Returns will again be low to negative for many producers. Projected returns above variable costs (contribution margin) range from $175 to $348 per acre for corn and $192 to $371 per acre for soybeans. (This is assuming fall cash prices of $4 per bushel for corn and $10 per bushel for soybeans.) Projected returns above variable costs for wheat range from $135 to $249 per acre (assuming $5.20 per bushel summer cash price).

Returns to land for Ohio corn (Total receipts minus total costs except land cost) are projected to range from $23 to $182 per acre in 2018 depending on land production capabilities. Returns to land for Ohio soybeans are expected to range from $84 to $254 per acre depending on land production capabilities. Returns to land for wheat (not including straw or double-crop returns) are projected to range from $28 to $135 per acre.

Total costs projected for trend line corn production in Ohio are estimated to be $760 per acre. This includes all variable costs as well as fixed machinery, labor, management and land costs. Fixed machinery costs of $65 per acre include depreciation, interest, insurance and housing. A land charge of $192 per acre is based on data from the Western Ohio Cropland Values and Cash Rents Survey Summary. Labor and management costs combined are calculated at $71 per acre. Returns Above Total Costs for trend line corn production are negative at -$93 per acre.

Total costs projected for trend line soybean production in Ohio are estimated to be $525 per acre. (Fixed machinery costs – $50 per acre, land charge: $192 per acre, labor and management costs combined: $48 per acre.) Returns Above Total Costs for trend line soybean production are also negative at -$23 per acre.

Total costs projected for trend line wheat production in Ohio are estimated to be $501 per acre. (Fixed machinery costs: $55 per acre, land charge: $192 per acre, labor and management costs combined: $42 per acre.) Returns Above Total Costs for trend line wheat production are also negative at -$110 per acre.

These projections are based on OSU Extension Ohio Crop Enterprise Budgets. Newly updated Enterprise Budgets for 2018 have been completed and posted to the OSU Extension farmoffice website:

https://farmoffice.osu.edu/farm-management-tools/farm-budgets