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Tax deductions, bonus depreciation and other bottom-line enhancing tools

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Producers considering buying, financing or leasing farm equipment may be qualified to take advantage of substantial tax savings under Section 179 again this year.

The Tax Cuts and Jobs Act passed in 2018 increased Section 179 limits to $1 million with a $2.5 million phase-out. These limits remain in effect for 2019 and are indexed for inflation.

Bonus depreciation, which is generally taken after the Section 179 spending cap is reached, will also allow producers to take 100% depreciation on eligible new or used assets acquired in the current year.

However, not all states conform with federal increases to expensing limitations or the federal treatment of bonus depreciation provisions.

Leasing considerations

According to Amy Weum, Farm Credit Leasing relationship manager, producers acquiring over $1 million in equipment this year should strongly consider leasing.

“If a producer purchases more than $1 million in equipment this year, they begin losing their Section 179 benefit dollar-for-dollar, and once they acquire $2.5 million or greater in equipment in the same year, they lose their Section 179 benefit altogether and would only have bonus depreciation left as an option,” Weum explains. 

By opting for a true tax lease, producers can avoid the diminishing benefit of Section 179 with purchases over $1 million, as a true tax lease offers lease payment write-off instead of taking Section 179 and bonus depreciation.

In contrast, by opting for a non-tax capital lease, producers receive the benefits of Section 179 and bonus depreciation, but also have the added benefit of lower payments and enhanced cash flow.

Comparing leasing options

While true tax leases remain a popular option for producers to deduct their lease payments as operating expenses, Weum says non-tax leases are becoming even more popular for improving working capital and enhancing cash flow compared to a loan.

“A conditional sales contract is a non-tax capital lease where the producer is entitled to the tax benefits of ownerships, just like a loan,” she says. “The most popular type of conditional sales contract is a Purchase Upon Termination (PUT) lease. This is a great option for producers who may have never considered a lease in the past.”

A PUT lease works like a loan with a balloon payment. The producer can take advantage of bonus depreciation and Section 179, and because of the residual at the end of the lease, the payment will typically be much lower than a loan.

Ultimately, this is a savvy way for producers to get the same tax benefits of a loan while enhancing cash flow by minimizing their payment.

“Leasing will continue to be an important tool for producers to manage their tax situation,” Weum says. “AgDirect offers both true tax leases and non-tax capital leases to meet their various needs and unique tax situations.”

“I encourage producers to consult with their tax advisor to find the best fit for their specific tax circumstances and cash flow requirements,” she adds.

Although tax incentives like Section 179 and bonus depreciation can be beneficial during challenging ag economic times, these provisions should only be used in situations that make long-term financial sense for your operation.

Check out the Official Website of Section 179 for more information and free tools and resources on how Section 179 deductions can impact your equipment costs and tax savings.

To learn more about equipment leases and how they might work for your operation, contact your nearest FCS Financial office.

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