TALK US THROUGH THE DECISION TO DEPRECIATE EQUIPMENT IN ONE YEAR VERSUS MULTIPLE YEARS.
From Glen’s perspective:
“There are many different factors to consider, but ultimately you need to look at the amount and percentage of taxes saved. Ask yourself these questions: ‘what tax bracket are you in?’ and, ‘if you take full depreciation, will you be in too low of a tax bracket?’ These can be breaking points along the way where it may not make sense to keep taking depreciation,” shares Birnbaum.
“Another factor to consider is whether cash was paid for equipment or it was purchased with debt. If the equipment was paid 100% in cash, then generally it is easier to recommend taking 100% depreciation in year one to match the cash outflow. However, farm income averaging is also an important consideration. If you have no income, there is no income to average.”
WHAT FINANCIAL FACTORS SHOULD I CONSIDER WHEN DETERMINING THE TIMING AND SELECTION OF MY EQUIPMENT PURCHASES?
From Glen’s perspective:
“Both used and new equipment can be depreciated fully. If you elect to depreciate out the equipment over a number of years, new equipment is over five years and used equipment is over seven years. In other words, bonus depreciation is allowed on used equipment,” says Glen.
Bonus depreciation is the ability to quickly write-off assets whether they are new or used, and was first enacted after September 11, 2001 at 30%. This allowed companies of all sizes to write-off items like equipment, at 30% of assets purchased upfront, with no limit. This was eventually increased to 50%, and in recent years went up to 100%, or 100% full write-off. However, starting in 2023 bonus depreciation is scheduled to start going down.
“There could be some incentive to buy in 2022, while maximum bonus depreciation is still allowed. Starting in 2023, bonus depreciation changes to 80%. However, Section 179 expense still remains, where farmers can write off up to $1,080,000 for 2022. That covers most of the farmers I deal with,” shares Birnbaum.
Another common question asked is, “Can I depreciate 50% in year one and 50% in year two?”
Birnbaum says that while you can’t depreciate 50% in year one and 50% in year two, there is flexibility in how much you depreciate in the first year due to Section 179. But, it’s important to note the remainder of depreciation must extend out to the life mentioned earlier.
Glen also mentions that aside from depreciation, the timing of an equipment purchase is difficult to consider due to a lot of external factors, like new technology that is on the market, repair costs, dealer sales programs and more.
BONUS DEPRECIATION SCHEDULE:
80% for property placed in service after December 31, 2022 and before January 1, 2024.
60% for property placed in service after December 31, 2023 and before January 1, 2025.
40% for property placed in service after December 31, 2024 and before January 1, 2026.
20% for property placed in service after December 31, 2025 and before January 1, 2027.
WHAT IS THE BETTER DECISION: PAY THE TAX BILL OR MAKE AN END OF THE YEAR EQUIPMENT PURCHASE?
From Glen’s perspective:
“Probably some sort of middle ground. Look at the amount of income you are ‘carrying over’ on December 31. This is the combination of unsold grain, deferred payment grain and prepaid expenses. This is the cumulative amount of income you have deferred over the years. As you near retirement, these assets will be converted to cash and the tax bill paid. If this carryover amount is tracked every year, you can see progress toward at least not making the problem worse. Depending on prospects for future tax increases, some farmers are looking to lower their carryover income each year, particularly those close to retirement. If you want to pay little to no income taxes, then debt levels will remain high and likely go higher. If you want to pay down debt and build up ‘liquid’ equity, then paying taxes is necessary. You can’t have it both ways.”
While we were happy to get some answers from Glen, every situation is different. Ultimately, it’s important to sit down and work with your individual tax professionals to answer your questions and ensure everything is done correctly for your situation.
As you’re reviewing your finances for 2022 and beyond and considering future equipment investments for your operation, KDK sales is here to help. For all your asset purchasing and liquidation needs, we can handle everything from single piece requirements to full retirement liquidations.