Federal Estate Tax Exemption Limits Set To Drop in 2013

By David L. Marrison, Associate Professor

At the end of 2010, President Obama signed “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” Most will remember that this bill extended many of the Bush era tax cuts. What many do not remember is that this legislation also made some significant changes to our federal estate tax laws. And quite frankly, this is the one area that concerns me the most when I think of the future of many of our farms across Ohio.

The estates of every U.S. citizen are subject to the federal estate tax upon their death. However, a certain potion is exempt from the tax. In 2012, this exemption is $5.12 million. Therefore, in 2012 if the value of the net estate – meaning the gross estate reduced by allowable estate tax credits and deductions – does not exceed $5.12 million, then the estate will pass to the heirs free from federal estate taxes. Any amount above $5.12 million is subject to a 35% tax. The increase to a $5 million exemption was a welcomed relief as individuals developed their estate plans.

The increase to the $5 million exemption is short lived as the increase only applies to 2011-2012. Congress must revisit the estate tax laws before the end of 2012, otherwise we will revert to pre 2001 exemption levels. This means that on January 1, 2013, the federal estate tax exemption will drop all the way down to $1 million and the estate tax rate will jump up to 55% (Ouch). This could affect hundreds of farms, small businesses and recipients of oil & gas lease payments. It is not hard for many of our farms to be valued at over $1 million dollars. Can you afford to pay a 55% estate tax on the value above $1 million? This could be a nail in the coffin for many small farms trying to transition their farm to the next generation.

So what can I do? I think it is imperative that farmers exercise their right to talk to their elected officials. Let them know how the changes on the bonus depreciation measures and the federal estate tax could affect your farm. More importantly, schedule an appointment with your attorney to make sure your estate plan is up to date. Be proactive not reactive!

Contacting Your U.S. House of Representative
Go to the House of Representatives website at: http://house.gov/ and search for your local congressman using the Zip code search engine and your State Senators at: http://house.gov/ and search by state.

Western Ohio Cropland Values and Cash Rents 2011-12

by: Barry Ward, OSU Extension, Leader, Production Business Management, Department of Agricultural, Environmental, and Development Economics

Ohio cropland varies significantly in its production capabilities and cropland values and cash rents vary widely throughout the state. Generally speaking, western Ohio cropland values and cash rents differ substantially from eastern Ohio cropland values and cash rents. This is due to a number of factors including land productivity and potential crop return, the variability of those crop returns, field size, field shape, drainage, population, ease of access, market access, local market price, potential for wildlife damage, and competition for rented cropland in a region. This fact sheet is a summary of data collected for western Ohio cropland values and cash rents.

Click here for the Western Ohio Cropland Values and Cash Rents Fact sheet 2011-12

Ohio cropland values and cash rental rates are projected to increase in 2012. According to the Western Ohio Cropland Values and Cash Rents Survey, bare cropland values are expected to increase from 7.3% to 9.1% in 2012 depending on the region and land class. Cash rents are expected to increase from 5.7% to 11.5% depending on the region and land class.

The “Western Ohio Cropland Values and Cash Rents” study was conducted surveying professionals knowledgeable about Ohio’s cropland markets. Surveyed groups include farm managers, rural appraisers, agricultural lenders, OSU Extension educators, farmers, landowners, and Farm Service Agency personnel.

Top Cropland
Survey results indicate that “top” performing cropland in western Ohio averages 193.8 bushels of corn per acre. Results also show that average value of “top” cropland in 2011 was $6,732 per acre. According to this survey “top” cropland in western Ohio is expected to be valued at $7,293 in 2012. This is a projected increase of 8.3%.

“Top” cropland in western Ohio rented for an average of $229 per acre in 2011 according to survey results. “Top” cropland is expected to rent for $250 in 2012. This equates to a cash rent of $1.29 per bushel of corn produced. Rents in the “top” cropland category are expected to equal 3.4% of land value in 2012.

Average Cropland
Survey results for “average” producing cropland show an average yield to be 160.5 bushels of corn per acre. Results show that the value of “average” cropland in western Ohio was $5,504 per acre in 2011. According to survey data this “average” producing cropland is expected to be valued at $5,916 per acre in 2012. This is a projected increase of 7.5%.

“Average” cropland rented for an average of $179 per acre in 2011 according to survey results. “Average” cropland is expected to rent for $194 per acre in 2012. This equates to a cash rent of $1.21 per bushel of corn produced. Rents in the “average” cropland category are expected to equal 3.3% of land value in 2012.

Poor Cropland
The survey summary shows the average yield for “poor” performing cropland equals 130.7 bushels of corn per acre. Results also show that the average value of “poor” cropland was $4,439 per acre in 2011. According to survey data this “poor” producing cropland is expected to be valued at $4,805 in 2012. This is an increase of 8.2%.

“Poor” cropland rented for an average of $140 per acre in 2011 according to survey results. Cash Rent for “Poor” cropland is expected to average $150 per acre in 2012. This equates to a cash rent of $1.15 per bushel of corn produced in 2012. Rents in the “poor” cropland category are expected to equal 3.1% of land value in 2012.

2012 Farm Bill: Status and Outlook

Carl Zulauf, Professor,
Department of Agricultural, Environmental and Development Economics
The Ohio State University

This article was reprinted with permission from the March/April 2012 issue of U.S. Canola Digest magazine (www.uscanola.com).

Background: A draft farm bill was written for potential submission to the Budget Reduction Super Committee as part of the ongoing debate over the federal budget deficit. The Super Committee process failed to reach consensus and the draft farm bill has never been officially released to the public. The farm bill now reverts to its normal process, but with at least broad outlines of a draft bill negotiated between several members of the House and Senate farm bill leadership. This paper provides a brief summary of widely-reported parts of the existing farm bill draft. The summary focuses on broad themes. The paper then briefly addresses implications of a return to the normal process and selected questions and issues.

Summary of Draft Farm Bill

It is widely-reported that the draft bill reduced spending on the farm safety net by $23 billion over 10 years, relative to baseline spending. The safety net includes farm programs and crop insurance. Savings largely came from eliminating the direct payment program.

A revised revenue shallow loss program was adopted in place of the ACRE program. Farms continue to have the choice of either a shallow loss revenue program or a price support program. The marketing loan program remains.

No cuts were made in farm insurance subsidies. A stand-alone revenue insurance program was created for cotton. A supplemental county revenue insurance program was added.

A revenue margin program was created for dairy. The margin is based on the difference between the price of milk and cost of feed.

Spending on conservation programs were cut, with a primary source of savings being a reduction in the maximum number of acres allowed in the Conservation Reserve Program. Some conservation programs were consolidated. The Environmental Quality Incentives Program and Conservation Security Program remain.

Spending on nutrition programs was reduced slightly. No major changes were made in the broad structure of nutrition programs although changes in some rules and regulations were proposed.

While not part of the farm bill, the ethanol and biodiesel blender credit and the ethanol import tariffs expired on December 31, 2011.

Returning to a Normal Farm Bill Process

The normal farm bill process is for the House and Senate Agriculture Committees to separately debate and draft, by majority vote, a bill. The bill is then debated and amended on the floor of each respective legislative chamber. Usually a conference committee convenes to compromise differences between the two bills.
In contrast to the normal process, the farm bill drafted for the Super Committee was written by a few Senators and Representatives. This does not mean the views of others were not considered, but it is reasonable to speculate that it is unlikely the full Agriculture Committees, as well as the House and Senate floors, agree with a farm bill drafted by only a few members.

A key factor framing future debate will be the size of the budget cut that the Agriculture Committees will have to address as their part of the cuts triggered by the Super Committee’s failure to report a substitute set of budget cuts. The larger these cuts, especially relative to the cuts assumed in drafting the Super Committee farm bill, the more likely will substantive changes be needed in the draft bill.

It also matters how the budget cut instructions, if any, are phrased. Specifically, will the Agriculture Committees be given a budget cut but then allowed to choose which programs to cut and in what years to make the cuts? Or, will the Agriculture Committees be given cuts for specific programs for specific years.

It is difficult to overstate the importance of the size, wording, and timing of the budget cuts.

Questions and Issues

Congress could decide to postpone enacting a farm bill in 2012. Supporters of this view note the difficulty this Congress has had in reaching compromises and the upcoming general elections. However, history suggests skepticism regarding postponement. While some farm bills since 1980 have been late, none have been postponed.

A key question framing debate over the farm safety net is how best to provide supplemental risk management protection over and above existing crop insurance coverage. Crop insurance subsidies are largely taken as given in the current farm bill debate. Discussion is focused on spending for other safety net programs. Insurance subsidies could become an issue if budget cuts exceed the cuts used in drafting the Super Committee farm bill.

Underlying this issue are questions about how much and what type of risk should individual farmers bear. These questions are not receiving as much attention, but are keys to deciding the eventual farm safety net. In particular, there are competing views between fixed, statutorily set target prices and a market oriented risk management policy designed to protect producers’ revenue.

Another key question is, how to handle so-called multiple year risks in a fair and fiscally responsible manner. Crop insurance addresses yield and revenue risks that occur between planting and harvest. It does not address multiple-year declines in revenue due to unexpected changes in markets or policy. Examples of multiple-year declines are the so-called grain demand collapse of the early 1980s and Asian financial crisis of the late 1990s.

Two issues are likely to have a stronger presence in the normal farm bill process. They are, tighter limits on payments to farms and whether conservation compliance should be required for all farm safety net programs, including crop insurance. Both are major concerns for many non-farm groups. Respectively, they are viewed as ways to make programs fairer for smaller farms, and as ways to sustain environmental gains as spending on conservation programs are cut. These are issues that make many farmers uncomfortable. However, they are part of the broader debates that occur when the farm bill is viewed as a social contract between the farm and non-farm sectors to improve all segments of the U.S.

Spring Safety on the Farm

By: Chris Bruynis, Assistant Professor & Extension Educator

The agricultural industry is one of the most dangerous occupations in the United States due to a broad range of risks associated with the occupation. Risks include road travel of slow, large equipment; many moving parts and wheels; a broad range of pesticides and fertilizers that have safety requirements associated with their use; and long hours associated with spring field operations.

Research from the National Safety Council indicates that 700 farmers and ranchers die in work-related accidents annually. Additionally, agricultural industry statistics also indicate that another 120,000 agricultural workers suffer disabling injuries from work related accidents. With proper safety measures in place and followed, many of the deaths and accidents could be prevented.

Dee Jepsen, OSU Specialist reminds us what is required and recommended for agricultural equipment while traveling on public roads:

  • At all times, an Slow Moving Vehicle (SMV) emblem is required
  • Headlights and taillights are required 30 minutes after sunrise and 30 minutes before sunset
  • Headlights and taillights are required during day hours if inclement weather conditions exist, including fog and rain
  • Additional extremity lighting is required on dual-wheeled tractors
  • Amber flashers and turn signals are recommended at all times
  • Ideally towed implements should have their own reflectors, lights, and an SMV emblem. However law requires these items be present when the implement blocks the lighting/marking configuration on the tractor.
  • Use escort vehicle when possible

Additional information on lighting and marking of agricultural equipment can be found http://ohioline.osu.edu/aex-fact/pdf/AEX_598_08.pdf

Other safety measures that should be observed around the farm include:

  • Provide safety training for all family members and employees (including volunteers)
  • Make sure all safety shields are in place and working properly
  • Make sure the family member is mature (old) enough to handle the task assigned
  • Follow all safety precautions on farm chemicals such a re-entry intervals and personal protective equipment
  • Make sure you have sufficient labor resources to get the work done. Tired, sleepy employees or family members are at increased risk for an accident.

A little common sense and some preventive measures go a long way in keeping everyone safe and making 2012 a productive, prosperous year.

Risk and Reward of Planting Early: Crop Insurance Implications

By: Chris Bruynis, Assistant Professor & Extension Educator

Unseasonably, warm, dry weather has prompted farmers to think about planting. If one looks at Mother Nature and the development of the tree leaves along with the current soil temperature, it is time to plant. But if one looks at the calendar and reads the provisions of their crop insurance policy it is not. So what is at risk?  According to Gary Schnitkey, Professor at the University of Illinois, COMBO products – which include Yield Protection (YP), Revenue Protection with harvest price exclusion (RPwExcl), and Revenue Protection (RP) plans – have “earliest planting dates”.  

In Ohio, the earliest planting date for corn is April 6th, and April 21st for soybeans.  To verify your county or check out a different crop go to http://webapp.rma.usda.gov/apps/actuarialinformationbrowser/2012/ReportDisplayCrop.aspx.

According to the USDA Risk Management Agency crops planted before the earliest planting date are not eligible for replant payments if those acres need to be replanted.  These acres will still receive full coverage for yield or revenue losses if good management practices are followed. As with planting after the earliest planting date, good farming practices must be followed on acres planted before the earliest planting date.  For acres planted before the earliest planting date, this may be a particular issue if the early planted acres result in a poor stand.  If good farming practices dictate those acres should be replanted, those acres need to be replanted even though those acres will not receive replant payments.

What are the potential replant payments for 2012?  The maximum indemnity is the chosen price election multiplied by the 20 percent of the yield guarantee, up to 8 bu for corn, 3 bu for soybeans. This year, based on crop insurance prices of $5.68/bu for corn and $12.55/bu for soybeans, these allowances imply a maximum replant payment of $45.44/ac for corn and $37.65/ac for soybeans.

What are the potential rewards? Most farmers I talk with tend to believe that earlier planted corn yields better.  Research by Purdue Extension indicates there is not a strong relationship between planting date and yield http://www.agry.purdue.edu/ext/corn/news/articles.07/PlantingDatePerspectives-0411.html. Others might argue better weed control or spreading out the time to get crops planted with the size and scale of equipment owned.  Whatever the reason, many farmers like to start early (if nothing else but for bragging rights at the local coffee shop).  So it begs the question “Is it too early to plant?”  I will tell you in about 45 days.

Marcellus Shale Payments Subject to Ohio CAT

By David Marrison, OSU Extension Extension Educator & Associate Professor

Landowners across Ohio may be surprised to learn the bonus lease and royalty dollars received for their Marcellus Shale Leases will be subject to the Ohio commercial activity tax (CAT) if payments of over $150,000 are received. The CAT was enacted in House Bill 66, which was passed by the 126th General Assembly. The CAT is an annual tax imposed on the privilege of doing business in Ohio, measured by taxable gross receipts from most business activities.

Most receipts generated in the ordinary course of business are included in a taxpayer’s CAT base. This tax applies to all types of businesses: e.g., retailers, service providers (such as lawyers, accountants, and doctors), manufacturers, and other types of businesses. The CAT applies to all entities regardless of form, (e.g., sole proprietorships, partnerships, LLCs, and all types of corporations). The tax does have limited exclusions for certain types of businesses, such as financial institutions, dealers in intangibles, insurance companies and some public utilities if those businesses pay specific other Ohio taxes. This tax has been in existence since 2005.

A person with taxable gross receipts of more than $150,000 per calendar year is subject to this tax, which requires such person to register with the Department of Taxation as a taxpayer. The term “gross receipts” is broadly defined to include most business types of receipts from the sale of property or in the performance of a service. Please note that certain receipts are not taxable receipts, such as interest income. The following are some other examples of receipts that are excluded from a taxpayer’s CAT base: dividends, capital gains, wages reported on a W-2, interest (other than from credit sales), or gifts.

Internal Revenue Code section 1231 provides guidance on why the oil & gas receipts are included in a taxpayer’s CAT base. Specifically, the Code states that timber, coal, and iron ore are considered property used in the trade or business, assuming they are contained in the ground. Once the mineral is removed from the ground, however, it is no longer an asset used in the trade or business, and therefore receipts from the sale of this mineral are included in a taxpayer’s CAT base.

So what are the tax rates for the CAT? The rate for the first $1 million in taxable gross receipts (from $150,000 to $1,000,000) is a flat $150. The rate for receipts above $1 million is 0.26%. The $150 annual minimum tax is due no later than May 10th of each year with the annual tax return for calendar year taxpayers or with the first quarter return for calendar quarter taxpayers. A calendar year taxpayer that will have over $1 million in taxable gross receipts for a calendar year is required to switch to a quarterly taxpayer in the subsequent year and, if it elects to, can switch to a quarterly taxpayer at any time during the current calendar year.

CAT Example:
John B. Landowner owns 400 acres in northeastern Ohio and is a teacher at the local high school. He leases his land for $3,000 per acre, which totals a bonus payment of $1,200,000. To calculate his CAT obligation, Mr. Landowner would pay $150 for the first million dollars and then apply the .26% tax rate for the remainder ($200,000),which equals $520. He has no other commercial business activity so his total CAT obligation would be $150 + $520 =$670.

Electronic registration for the CAT is available online through the Ohio Business Gateway. Paper registration forms can be downloaded at http://tax.ohio.gov/forms/index.stm. More information about the CAT can be obtained from the Ohio Department of Taxation at http://tax.ohio.gov, by email link at http://tax.ohio.gov/channels/global/contact_us.stm, by telephone: 1-888-722-8829, or by mail at: P.O. Box 16158 Columbus, Ohio 43216-6158

Ohio CAT Website. http://tax.ohio.gov/divisions/commercial_activities/index.stm

Ohio CAT Frequently Asked Questions. http://tax.ohio.gov/faqs/CAT/cat.stm

Informational Handout: Commercial Activity Tax: I.R.C. Section 1221 and 1231 Assets Excluded from “Gross Receipts” http://tax.ohio.gov/divisions/communications/information_releases/CAT/documents/CAT200508.pdf

Claiming Depletion Deductions on Your Oil and Gas Income

Chris Zoller & David Marrison, Extension Educators, ANR and Peggy Hall, Director, OSU Agricultural & Resource Law Program

Many landowners have received income as a result of leasing their land for oil and gas drilling, while others may also be receiving income from drilling in the form of royalty payments. This is income for tax reporting purposes is considered ordinary income and must be reported as such on your state and federal income tax returns. Many landowners have asked about available strategies for minimizing the tax liability associated with this new wealth.

There are a number of ways landowners can potentially reduce their tax liability and be in compliance with the tax laws. Not all strategies are applicable to every situation, but landowners should give careful consideration to those that are available and maximize their tax savings.

One tax management strategy is to claim a depletion deduction. The IRS recognizes that oil, gas, and other minerals are used up or depleted as they are extracted and does allow for a reasonable deduction when calculating taxable income. To qualify, the landowner must have a legal ownership interest and be receiving income from the extraction. The deduction is allowed only when oil or gas is sold and income is reportable. The IRS requires a landowner to compare two methods when calculating the deduction:

• Cost depletion – a unit of production that uses the landowner’s basis in the property.
• Percentage depletion – a specified percentage (15 percent for natural gas) of the landowner’s gross income from the property, limited to the lesser of 15 percent of 100 percent of the landowner’s taxable income from the property or 65 percent of the landowner’s taxable income from all sources times 15%.

The method of computing the depletion deduction is not elective and tax filers must use the larger of the two amounts between cost and percentage depletion. Because most landowners do not have a cost basis in the minerals leased they automatically must use the percentage depletion method.

Example of Percentage Depletion:

Farmer Jefferson received royalty income of $12,055. This is the only income received from his real estate. To calculate the percentage depletion, Farmer Jefferson multiples $12,055 by 15%, which equals $1,808. He then compares this to the taxable income from all sources, say $30,000. The percentage depletion limit would be $30,000 times 65% times 15%, which equals $2,925. Because $1,808 is smaller than $2,925, Farmer Jefferson’s depletion would be $1,808 for line 18 on Schedule E.

Penn State University Extension has a detailed fact sheet on depletion deductions and other tax management options. To access this information go to: http://pubs.cas.psu.edu/FreePubs/PDFs/uh190.pdf. A similar Ohio State University Fact Sheet is under review and will be available soon. If you are interested in a copy of the OSU Extension Fact Sheet on this topic, please contact Chris Zoller at zoller.1@osu.edu or 330-339-2337.

Considerations Prior to Signing a Pipeline Easement

Chris Zoller, Extension Educator, ANR for Tuscarawas County

Thousands of dollars have been paid and a large number of acres across parts of Ohio have been acquired through leases for the exploration of oil and gas resources. Some of these areas are seeing drilling activity as a result of these leases. The next step in the process is acquiring easements for the purchase of land to construct pipelines to move the extracted minerals to locations where they can be processed.

It is important for all landowners who are contacted about signing an easement to understand that an easement differs from a lease in many ways and comes with certain restrictions on the use of the land. A few years ago a 42” pipeline, known as the Rex Express Pipeline – East Project, was constructed through several Ohio counties. Prior to construction of this pipeline, the Ohio Department of Natural Resources Division of Soil and Water Conservation developed an agreement with the pipeline company that required certain practices be followed to preserve soil and water resources on the affected lands.

This document, Pipeline Standards and Construction Specifications, provides landowners with a number of factors to consider before signing an easement for the construction of a pipeline on their property. The document is available from your local Soil and Water Conservation District or on-line at: http://www.dnr.state.oh.us/tabloid/22295/Default.aspx

Landowners are encouraged to review this document and incorporate applicable provisions into their easement. All landowners are strongly encouraged to work closely with trained professionals to draft an easement agreement that is in their best interest and conserves soil and water resources.

Lower Crop Insurance Premiums for Most Corn and Soybean Growers in Ohio

By: Barry Ward, OSU Extension, Leader, Production Business Management, Department of Ag, Env., and Dev. Economics

Farmers throughout Ohio insuring corn and soybean yields or revenue with crop insurance should see lower premiums this year due to changes made by USDA’s Risk Management Agency (RMA).  These changes were based on reviews of actuarial soundness of these crop insurance products. In recent years, premiums paid (farmer premiums plus USDA paid premium subsidies) have been higher than dollars in claims paid out. The Federal Crop Insurance Loss Ratio (Ratio of claims to premiums) is meant to equal 1.0 in the long term. With long-term loss ratios below this 1.0 benchmark for corn and soybean policies in most of the cornbelt, RMA chose to examine the soundness of these policies. This adjustment to premium rates recognizes the latest technology, weather, and program performance information. Updated data pertaining to prevented planting, replant payment, and quality adjustment loss experience, was also used in determining rates changes.

 The following excerpt from an RMA article on “USDA Moving to Lower Insurance Premiums For Corn and Soybean Producers in 2012” explains in some detail the process taken to evaluate these crop insurance policies. “RMA contracted for a study by Sumaria Systems Inc., which examined premium rates, and the rating process, starting with the United States’ two major commodities: corn and soybeans. RMA then requested an independent expert peer review to provide feedback on the Sumaria study results. RMA will conduct further review and analysis of the study’s recommendations along with comments and issues raised by peer reviewers, making additional adjustments as warranted and appropriate. Accordingly, RMA is taking action to implement adjustments to premium rates in a “phased in” approach that allows for any further adjustment pending additional analysis of peer review comments.”

 As a result of this process Ohio growers should expect to see premiums decrease by an average of eleven percent for corn acres insured and thirteen percent for soybean acres insured.

 RMA Premium Adjustments not to be Confused With the New Trend-Adjusted Actual Production History (APH) Option!

With the new “Trend-Adjusted Actual Production History (APH) option) available to crop producers this year for most corn-belt states, producers choosing this option may see some of the potential premium savings from RMA adjustments reduced. Experts disagree on how this option may change your premiums and this should by no means discourage producers from considering this option. You should consult your crop insurance agent for details on this new option and premium changes as a result of adding the option to your policy.

 See the previous article by Chris Bruynis on the Ohio Ag Manager Site on the “Trend-Adjusted Actual Production History (APH) Option at: http://ohioagmanager.osu.edu/farm-policy/trend-adjusted-actual-production-history-aph-option-available/

 Web Links for further information: http://www.rma.usda.gov/news/2011/11/cornsoybeanpremium.html and http://www.rma.usda.gov/help/faq/rerating.html

Section 179 & Accelerated Depreciation Limits for 2012 and Beyond

By: David Marrison, Associate Professor and Extension Educator

Over the past decade, Congress has repeatedly allowed faster depreciation of capital assets to stimulate business investment by providing a “bonus” depreciation allowance in the year the asset is purchased. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the depreciation bonus through 2012 to encourage new equipment purchasing.  Section 179 Expensing and Accelerated First Year Depreciation allowances have allowed business to write off capital expenditures immediately minimizing taxable income or creating a loss from these schedules. 

I.R.C. § 179 expensing allows farmers to elect to deduct part or all of the cost of qualifying farm assets in the year they are placed in service.  It applies to machinery, equipment, and special use or single purpose agribusiness buildings, such as bins, drying systems, and livestock barns. But it is not available for general purpose agricultural buildings, such as machine sheds and shops, nor is it often available to landlords who purchase or construct properties used by a tenant.

While it is a great tax incentive, there are limits to Section 179. The main limitation is the total cost of the deducted equipment in 2012 cannot exceed the total amount of the taxable income you are reporting.  Under current law, the dollar limit is $139,000 in 2012 and will be $25,000 each year thereafter. The maximum threshold for total of equipment & software that can be purchased under this provision has increased to $560,000.  Any amount not utilized in the current year can carry forward.  New or used equipment and certain software are eligible for this deduction.

Accelerated First Year Depreciation for 2012 is limited to 50% of the purchase price.  To qualify, the asset must have its original use begin with the taxpayer (only new equipment) and have a depreciable life of 20 years or less. Virtually all farm-use assets have a depreciable recovery period of 20 years or less, and accordingly are eligible. Bonus depreciation is most effective when applied to assets with a longer recovery period, such as machine sheds and shops (20 years), or drainage tile and culverts (15 years). Currently, the tax law does not extend bonus depreciation past December 31, 2012. 

The Future- With 2012 being an election year, anything is possible with regards to the percentage and limitation amounts for I.R.C. § 179 Expensing and Accelerated First Year Depreciation.  Farmers should watch the actions of Congress and plan accordingly.  With the reduction of the I.R.C. § 179 to $25,000 and the potential elimination of accelerated first year depreciation in 2013, farm business should examine if 2012 is the time to consider a capital equipment purchase. Be careful, however, to not the let the tax tail, wag the business dog.  Because depreciation is an amortized deduction, purchasing assets which are to be depreciated to reduce your tax liability may not be the best use of your cash.  Evaluate your current situation to determine if purchasing depreciable assets is appropriate.   Consultation with a tax professional is highly suggested.  Don’t buy “new paint” or “new steel” without first doing a comprehensive cost analysis.

Loss Limitations-It should be noted for years beginning after 2009, excessive farm losses are not deductible if you receive certain subsidies such as direct or counter cyclical payments.  Farmers receiving these payments are limited to the greater of $300,000 or the total net farm income for the prior five tax years.  These loss limitations may affect farmers who are receiving oil & gas bonus lease or royalty payments and who are using accelerated depreciation as a method to create a loss on their schedule F to offset the gain from the gas payments.  For more information, see the 2011 Farmer’s Tax Guide, page 26.

More information: Additional information on this subject can be found on the Internal Revenue Service’s web page at http://irs.gov.  Good resources include Form 4562, Instructions for 4562 and Publication 946-How to Depreciate Property.