Many wine industry and agribusiness leaders remain uncertain about the depreciation tax incentives available to their business. Here are the answers to some of agribusiness’s most pressing questions about Section 179 vs Bonus Depreciation.
In capital-intense industries like winemaking, farming and other associated agribusinesses, it’s easy for even a relatively small mom-and-pop operation to spend millions of dollars in a single year on equipment purchases, planting and other capital investments. Thankfully, they’re just who the government has in mind with the Section 179 tax deduction.
Available in one form or another since the 1950s, Section 179 currently allows small businesses and mid-size companies to write off all or part of the cost of certain kinds of property purchased and put into use for purposes of conducting business in the current tax year.
But it’s not just small operations that can benefit from full first-year depreciation incentives in today’s tax environment. Businesses of any size and revenue can make use of bonus depreciation, which has recently been increased to 100% of the cost of certain kinds of property, and will stay that way until tax year 2023.
These incentives can be huge for farmers, wineries and other agribusinesses looking to make strategic tax deductions on their tax returns. That’s why it’s important that agribusiness leaders understand the differences between Section 179 and bonus depreciation, and when to use which to save the most money on their taxes. With that in mind, here are just a few of the most frequently asked questions BPM’s agribusiness tax professionals are hearing this year, and how they’re explaining the topic to clients.
What are the biggest differences between Section 179 and bonus depreciation deductions?
First off, the similarities: Section 179 and bonus depreciation both allow companies to write off the cost of certain kinds of property put into use during the current tax year faster than they would be able to under standard tax depreciation schemes, which require companies to deduct depreciation from their taxable business income over time according to complex rules incorporating aspects like the asset’s purpose and class. For tax year 2019, both Section 179 and bonus depreciation deductions allow companies to deduct the full cost of respective qualifying property.
Why is full first-year depreciation so valuable? While it’s true that either way, a company will ultimately be able to deduct the full cost of property it purchases, the reason accelerated depreciation is considered a tax benefit is because of the time value of money principle (TVM). The TVM simply states that money now is better than money later. Assuming you can put the money to good use — i.e., allow it to earn interest — the identical amount will always be worth more to a company or individual now rather than later. The TVM is not the only factor that businesses should consider when planning taxes, but it’s still a guiding principle.
While Section 179 and bonus depreciation are similar philosophically, when you get into the details a number of differences emerge. These include:
— Types of property eligible: Both Section 179 and bonus depreciation apply to tangible personal property and certain kinds of tangible nonresidential real property, including property used in production, manufacturing and extraction. Both exclude most buildings and building improvements, although Section 179 does allow certain improvements to nonresidential buildings to qualify. Additionally, both include certain kinds of computer software. Of particular importance for agribusinesses, Section 179 also applies to certain specialized real property, such as farming structures.
— Annual dollar limit: The maximum deduction you can claim with Section 179 in 2019 is $1,020,000. Additionally, there is a phase-out threshold of $2.5 million, meaning the amount available to your business for a Section 179 deduction is reduced, dollar-for-dollar, by the amount of Section 179 property you have over $2.55 million — until the amount you can deduct reaches zero. Thus, you cannot take a Section 179 deduction if you have qualifying Section 179 property exceeding 3.57 million. (Section 179, readers will note, is thus obviously geared toward smaller businesses.) Bonus depreciation, by comparison, has no annual dollar limit and no phase-out threshold. One consequence of this is that the only businesses that have to make a choice about when to use each incentive are, generally speaking, smaller businesses.
— 100% bonus depreciation will be phased out: 100% bonus depreciation was enacted for tax year 2017 with the passage of the Tax Cuts and Jobs Act. It is currently scheduled to be phased out starting in 2023. Starting with tax year 2023, the percentage of bonus depreciation allowed will be stepped down by 20% each year until it reaches zero in 2027.
Should we still use the Section 179 deduction if it puts the business at a loss?
No! Section 179 deductions can only be used to reduce taxable income. They cannot create a net operating loss (NOL). In a scenario where the potential Section 179 deduction would be greater than a company’s taxable income, you could still reduce your taxable income to zero, and then carry forward the remainder indefinitely to future tax years. But you would not be able to take the full deduction in the first year.
Bonus depreciation, on the other hand, can be used give you an NOL, which your business then carries over to future tax years. So if you have a low taxable income for the current tax year, you might want to opt for bonus depreciation where possible.
There are still other considerations beyond the possibility of creating an NOL with the deduction, however. If your net operating losses are expiring soon, you might not want to take a Section 179 or bonus depreciation deduction at all. Instead, you might want to depreciate property acquired in the current tax year over time. That way you’d be able to take advantage of the expiring benefit and have tax benefits to apply to tax years to come.
Do trees, vines and wells qualify for bonus depreciation or Section 179 deductions?
The 2015 PATH (Protecting Americans From Tax Hikes) Act explicitly extended bonus depreciation to trees and vines planted or grafted between Dec. 31, 2015 and Jan. 1, 2020, as long as they bear fruits or nuts and have a pre-production period of at least two years. (“Pre-production period” is defined as the amount of time between being planted and producing fruit.)
The upshot for grape and other fruit growers is that agribusinesses can deduct the full cost of planting and acquiring most trees and vines planted in 2019.
Alternatively, once the tree or vine enters service — meaning it begins producing fruits or nuts that will ultimately be sold to customers — businesses can claim a Section 179 deduction in the year it’s placed into service, assuming the business’s total Section 179 qualifying property falls within the phase-out threshold explained above.
Don’t miss out on these tax benefits. Contact BPM today.
While these full-year depreciation tax incentives can be extremely beneficial to agribusinesses, uncertainties remain. The IRS, for instance, has yet to release any clear guidelines about deducting well construction or addition costs under Section 179. We highly recommend that you contact your BPM tax advisor to assist you through this process.
From California’s Central Valley to the North Bay, the West Coast and beyond, BPM’s Agribusiness group has helped numerous wineries, farmers, manufacturers and producers, among others, solve these critical Section 179 dilemmas, ensuring clients get the best possible tax savings and boosting their businesses in the process.
Reach out to BPM’s Agribusiness team today and get answers to all your burning questions before Tax Day rolls around.
BPM for Agribusiness
BPM is one of the largest California-based accounting and consulting firms, ranking in the top 50 in the country. It has been serving California’s agricultural land communities for the past 25 years by providing a complete offering of tax, accounting and consulting services from initial set-up of accounting systems, forecasting, bank loan negotiation, business succession planning, IC-DISC and CFO services. By actively participating in industry trade associations, BPM professionals stay ahead of business and regulatory changes impacting businesses. For more information, visit https://www.bpmcpa.com/Agribusiness.