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Year-End Tax Planning Strategies: Depreciation

Part 1 of 2 Part Tax Strategy Series

As we approach the end of another year, we thought it would be a good time to talk about some year-end tax planning strategies. Of course, having up-to-date records is essential for the tax planning process. If you discover that you might end up with a large tax liability, there are a few things you can do before the year is over.

In this series of two blog posts, we will examine two different strategies of accelerating expenses. This post will cover the depreciation strategies of using Section 179 and Bonus Depreciation. The next post covers prepaid expenses.

Section 179 Expensing 
For 2019, the Section 179 deduction is $1,020,000 with a purchase limit of $2,550,000. In other words, if you have purchased more than $2,550,000 in qualifying property, the allowed deduction is reduced dollar for dollar on the amount over the limit. Qualifying property is “tangible personal property” (e.g., cattle, machinery and equipment, single purpose buildings, etc.) placed in service and available for use by December 31, 2019.

Please remember that the Section 179 deduction is limited to the amount of your taxable income from your trade or business as computed before the deduction. Keep in mind, though, that any amount that is disallowed due to income limitations may be carried forward and deducted in a future year.

100% Bonus Depreciation
The additional first year Bonus Depreciation is now at 100% for qualified property placed in service after September 27, 2017, and before January 1, 2023.

Qualifying property in this instance is:
  1. property to which MACRS depreciation applies with a recovery period of 20 years or less
  2. water utility property
  3. non-custom-made computer software
  4. qualified leasehold improvement property
The definition of property eligible for 100% depreciation was expanded to include certain used qualified property, along with the original use guidelines (new property).

Which Strategy Should I Use?
Each taxpayer’s situation is different. An important distinction between Bonus Depreciation and the Section 179 deduction is that it is (a) not limited to taxable income from a trade or business and (b) does not have a phase-out threshold or maximum purchase limit. If your business operates at a high-income level, you may want to consider Bonus Depreciation.

While both the Section 179 and Bonus Depreciation can be useful tools for managing your Federal tax liability, most states are not allowing Bonus Depreciation, and not every state’s Section 179 limit has been increased to match the Federal limit. Be sure to look at your state tax liability as well.

Please contact your Farm Credit Tax Specialist to review which approach would be right for you, or email our Tax Service department at:

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