New legislation offers tax relief for ag producers

New legislation allows farmers and ranchers to gain immediate tax relief through additional depreciation on equipment and property.

The Job Creation and Worker Assistance Act of 2002, signed into law by President Bush on March 9, allows businesses to write off more of their equipment purchases in the first year, according to the Farm Service Agency in Montana.

Specifically, businesses are eligible to claim an additional first-year depreciation deduction equal to 30 percent of the cost of the equipment. This bonus depreciation applies to most types of business property purchased between Sept. 11, 2001, and Sept. 10, 2004. Most depreciable farm property, except real estate, would be considered qualifying property, including farm machinery and equipment, crop-storage facilities, and single purpose agricultural and horticultural structures.

Because the bonus depreciation provision was made retroactive to Sept. 11, 2001, many businesses that bought equipment late last year will be eligible to claim extra deductions on their 2001 tax returns. Those who already filed their returns will be able to take advantage of the new law benefit by filing an amended return.

For 2002, the amount of farm capital investment that could be written off is estimated to increase by about 15 percent or $1.8 billion as a result of these provisions. This should reduce federal income and self-employment taxes paid by farmers by more than $500 million a year.

For example, a farmer who purchased a combine after Sept. 10 for $100,000 would be able to expense $24,000 under the Section 179 expensing election. Under the new law, the farmer would then be allowed an additional first-year depreciation deduction of $22,800, which is equal to 30 percent of the remaining cost of $76,000. Finally, the remaining cost of $53,200 could be depreciated under the current depreciation rules. That would permit an additional depreciation deduction of $7,980.

As a result, the farmer would be able to deduct a total of $54,780 of the $100,000 investment in the first year. This is an increase of $19,380 as a result of the 30 percent additional first-year depreciation provision.

Assuming the farmer is in the 15 percent federal marginal income tax bracket, the federal income and self-employment tax savings would equal $5,440, according to the FSA.