Tax Relief Act Changes Benefit Poultry and Egg Business (Opinion)

In December 2010, President Obama signed what’s commonly called the Tax Relief Act in an effort to stimulate the economy.

This legislation includes depreciation and IRC Section 179 deduction changes to encourage spending by businesses. The changes were retroactive to Sept. 9, 2010, and will benefit both large and small companies in several ways.

• The law allows 100 percent first-year bonus depreciation for qualifying new assets such as equipment, land improvements and qualified leasehold improvements acquired and placed in service between Sept. 9, 2010, and Dec. 31, 2011. The deadline is extended to Dec. 31, 2012, for certain assets that have longer production periods.
• The new law allows 50 percent first-year bonus depreciation for eligible assets placed in service during the 2012 calendar year. The deadline is extended to Dec. 31, 2013, for certain assets that have longer production periods.
• Earlier this year, the IRS provided the limitation amounts for vehicles placed in service in 2011 that do and do not qualify for bonus depreciation.

For new passenger autos used 100 percent for business that qualify for bonus depreciation and are placed in service in 2011, the depreciation limit is $11,060 for the first tax year. Light trucks and vans used 100 percent for business have a limit of $11,260.

For used or previously owned passenger automobiles to which bonus depreciation does not apply, the depreciation limit is $3,060 for the first year. For trucks and vans, the limit is $3,260 for the first year.

With or without bonus depreciation, automobiles and light trucks are depreciated the same.

For passenger automobiles, the taxpayer may take $4,900 for the second tax year; $2,950 for the third tax year; and $1,775 for each successive tax year.

For light trucks and vans, the taxpayer may take $5,200 for the second tax year; $3,150 for the third tax year; and $1,875 for each successive year.

• The 100 percent and 50 percent first-year bonus depreciation rules apply for both regular tax and alternative minimum tax purposes; therefore, assets subject to the bonus depreciation rules have the same depreciation deductions for both purposes.
• Bonus depreciation is discretionary.

If a taxpayer determines 100 percent bonus depreciation is not beneficial, it’s possible to take 50 percent bonus depreciation or to not take any bonus depreciation.

This election is made by asset class, so it is not an all-or-nothing proposition.

• Expensing the cost of purchased equipment also changed.

In 2003, Congress increased the Section 179 deduction by $76,000 to $100,000 to induce businesses to invest in equipment. For the tax years beginning in 2010 and 2011, the Small Business Jobs Act increased the maximum deduction to $500,000 with a phase-out threshold of $2 million.

For assets placed in service in tax years beginning in 2012, the maximum Section 179 deduction is $125,000 (adjusted for inflation) with a phase-out threshold of $500,000. If Congress doesn’t extend the provision again, the Section 179 limits will revert to $25,000 and $200,000, respectively, beginning in 2013.

Eligible assets are similar to qualified bonus depreciation property with the exception of land improvements.

However, poultry and egg producers may have a number of assets the IRS considers other tangible property that will qualify for the Section 179 deduction, such as fencing, water wells and certain farm buildings.

In contrast to qualified bonus depreciation property, Section 179 property can be new or used. The expensing can be combined with bonus depreciation for a greater tax benefit. However, the deduction created by expensing cannot create a net operating loss for the taxpayer, while there is no such limitation on bonus depreciation deductions. In most cases, the Section 179 deduction can be a tool to reduce state income taxes, whereas bonus depreciation is disallowed by most state taxing authorities.

All of these changes will impact your poultry and egg operations through 2012 and give you an opportunity to increase your after-tax cash flow and bottom line.

Scott Gammill is the managing director of Cost Segregation Services at Frost PLLC. Contact him at [email protected] or 501.975.0120.