What you need to know in 2020
Originally published on agdirect.com
Planning your next farm equipment purchase? Whether you intend to buy, finance or lease, you may be qualified to take advantage of substantial tax savings under Section 179 again this year.
Here’s your guide for navigating Section 179, bonus depreciation and other bottom-line enhancing tools in 2020.
Deduction limits
The Section 179 deduction limit for 2020 was raised to $1,040,000 with an equipment spending cap of $2,590,000. This is a slight increase from the 2018 and 2019 Section 179 tax deductions which were set at a $1 million limit with a threshold of $2.5 million in total purchases.
Bonus depreciation, which is generally taken after the Section 179 spending cap is reached, will again be offered at 100% on eligible new or used assets acquired in the current year.
Keep in mind not all states conform with federal increases to expensing limitations or the federal treatment of bonus depreciation provisions.
Qualifying property
Using the Section 179 deduction, you can write off the entire purchase price of qualifying equipment up to the deduction limit. In 2018, qualifying equipment was expanded to include both new and used equipment. This definition of qualifying property remains in effect for 2020.
In addition to equipment purchases, other eligible items may include “off-the-shelf” computer software, breeding livestock, and single purpose structures, such as milking parlors. Before making any large capital purchases, it’s a good idea to consult with an accountant or tax adviser to ensure deductions are claimed according to the Section 179 code.
Leasing considerations
Leasing continues to be an effective tool for lowering payments and preserving cash and credit lines. From a tax perspective, two of the most popular types of leases are a true tax lease and a conditional sales lease.
By opting for a true tax lease, you can avoid the diminishing benefit of Section 179 and take advantage of a consistent write-off over the course of the lease rather than expensing 100% in the first year only.
In contrast, a conditional sales lease enables you to take depreciation just like a loan while benefitting from a lower lease payment, making it an attractive option if you’re looking to enhance cash flow.
Impact on equipment costs
The potential savings from Section 179 can have a significant impact on your equipment costs. If you’re considering an equipment purchase in the current tax year, you can estimate those savings using the 2020 Section 179 Tax Deduction Calculator.
For example, a $200,000 tractor coupled with Section 179 can reduce the true cost of the purchase to $130,000, freeing up $70,000 in cash savings. This sample calculation assumes a tax bracket of 35%.
The calculator presents a potential tax scenario you can use to gauge the various ways Section 179 can impact your bottom line. Talk to your tax advisor to determine how the indicated tax treatment applies to your equipment purchase.
Other takeaways
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. That’s why it’s important to always consider your tax circumstances and cash-flow requirements when using these tools.
To learn more about equipment leases and how they might work for your operation, contact by locating your nearest FCS Financial office.
