Equipment Trade-ins Get Complicated
DTN PROGRESSIVE FARMER – ELIZABETH WILLIAMS – INDIANOLA, Iowa (DTN) — Tax treatment of equipment trade-ins got a tune-up in 2017’s tax reform legislation. Experts say provisions restricting like-kind exchanges for machinery are offset by more generous rules on depreciation, resulting in little change to federal tax returns.
The complication: many states didn’t follow suit, especially on like-kind exchanges, which are also known as 1031 exchanges and allow taxpayers to trade equivalent properties without a taxable event taking place.
“In my state, Minnesota, if the legislature does not fix the 1031 issue we may have farmers owing more to the state than to the IRS, said Rod Mauszycki, principal with CliftonLarsonAllen in Minneapolis, and DTN/The Progressive Farmer’s tax columnist. “Although I’m confident that a fix will be adopted, it might not be quick enough. As a result, we may have to delay filing the 2018 tax returns.”
Without 1031 exchanges, the tax treatment of trade-ins becomes more complicated. It’s just one way changes to the tax code are forcing farmers to change their mindset. In this four-part series, DTN explains how to maximize deductions by avoiding losses, how to navigate new rules for equipment and why it might be a good time to change your farm’s corporate structure to take advantage of lower tax rates and reconsider gifting strategies.
TWO TRANSACTIONS FOR TAX PURPOSES OFFSET BY BETTER DEPRECIATION
The amount of equipment and software that can be depreciated in a given year has been increased from $500,000 in 2017 to $1 million in 2018. The phase out for the $1-million availability begins after equipment purchases exceed $2.5 million in a given year. However, beginning Sept. 28, 2017, until the end of 2022, 100% bonus depreciation applies to almost all purchases of farm property, including used property. The bonus depreciation phases out beginning in 2023.
Additionally, new farm equipment can now be depreciated over five years rather than the seven years previously allowed. However, used farm equipment depreciation continues with a seven-year life.
Because Congress eliminated like-kind exchanges for equipment — it kept the provision for real estate transactions — equipment trades will now be considered as two transactions for tax purposes.
Picture: DTN file photo
As harvest winds down, farmers are starting to turn their thoughts to next year and whether they need to make any changes in their equipment lineup. The tax rules governing trade-ins are now more complicated.