July 17, 2018
The New Rules in Ag Depreciation: Start Planning!
There is good reason to be excited if you are working in agribusiness with the new depreciation rules that are coming into play. We say this with a word of caution though; although changes that help farmers are being implemented on a federal level, it has still not been confirmed whether or not the state of California will be instating any of the new depreciation rules.
Expanded Bonus depreciation rules
One of the most important changes to note is the change in the amount of bonus depreciation from 50% to 100%. This change also allows both new and used assets to be eligible for bonus depreciation, whereas previously bonus depreciation could only be applied on new assets. Now you might be asking, “Okay, what does this really mean?” Partner Chad Van Houten gives an example, “If you buy a new property, you often have the land along with improvements such as vines, trees, irrigation, wells, etc.. You can write off all of those costs in the first year, with the exception of the land, whereas before you could only take the 179 deduction which is more limited. Now you can qualify for bonus depreciation and get a 100% deduction which is a huge difference.”
Vehicle & Depreciation Rules
Another change to highlight when it comes to depreciation is on trade-in vehicles and equipment. Previously, you didn’t have to pick up the gain on traded assets, but you reduced your basis in the new asset. Now you do have to pick up the gain. This is mitigated with the new depreciation rules. “Though you may have to pick up the gain on the traded-in asset, you can write off the entire amount on a replacement asset – so it’s not a tax hit,” Chad tells us.
No longer waiting for a marketable crop
Before, for many permanent crops you had to wait until you had a marketable crop to begin deducting pre-productive expenses and often times our clients were timing their new orchard developments around this time period to offset expected increases in income. Now there is no more need to wait as most farmers will be able to deduct pre-productive costs as they incur them. These new rules bring a lot of new options which is why you need to do some real, additional planning.
Now more than ever it is important to set aside time to take pre-planning steps with the new rules in place. Again, there is reason to be excited for these new rules that provide some relief for the ag industry, but cautiously so. We still do not know if additional tracking may still need to be completed for state return purposes. This is dependent on whether or not California will implement some or all of these changes.
As always, contact a member of our Ag team if you have any questions or would like additional information at (209) 537-4220 or firstname.lastname@example.org