Farming businesses can benefit from increased Section 179 expense deduction and extension of bonus depreciation.
| By David P. Webb|
and D. Nathan Smith
President Obama signed into law the Small Business Jobs Act of 2010 on Sept. 27, 2010 (the “Act”). The Act extended or introduced provisions designed to lessen the tax burden of small businesses. Many of these tax-saving provisions will be available to assist in the farming business. The two biggest ones will be the increased Section 179 expense deduction and the extension of bonus depreciation.
Increased Section 179 Expensing
The Section 179 expense deduction typically available to businesses is $250,000. However, the Act increases the deduction to $500,000 for qualified property purchased and placed in service in 2010 and 2011.
Note that the Section 179 expense deduction begins a dollar-for-dollar phase out when qualifying property of $2,000,000 or greater is placed in service. If qualifying property exceeding $2,500,000 is placed in service, the expense deduction will be completely phased out. The Act also extends the definition to include “qualified real property.” Importantly for farmers, qualified real property includes leasehold improvement property used in the trade or business. Up to half of the $500,000 expense deduction may be qualified leasehold improvement property.
Extension Of Bonus Depreciation
Because property that qualifies for Section 179 expensing also typically qualifies for bonus depreciation, the two deductions may be combined for qualifying property. The interaction of the two deductions is demonstrated in an example shown in the yellow box.
Five-Year Carryback Of General Business Credits
Removal Of Cellular Phones As Listed Property
Deduction For Health Insurance Costs In Computing Self-Employment Tax
Relaxed Penalty For Failure To Disclose Reportable Transactions
Currently the mandatory penalty for failing to disclose a reportable transaction is $10,000 for individuals and $50,000 for all others. Listed transactions carry a mandatory penalty of $100,000 in the case of individuals and $200,000 for all others.
Under the Act, the penalty is made proportional to the actual tax savings that were the object of the transaction. Failure to disclose a reportable transaction now results in a penalty equal to 75 percent of the reduction in tax reported on the taxpayer’s return as a result of participation in the transaction. A minimum penalty of $5,000 for individuals and $10,000 for all others is established, and the maximum level for all penalties is capped at the levels of the mandatory penalties prior to passage of the Act. The revised penalty structure is effective for all Section 6707A penalties assessed after Dec. 31, 2006.
In conclusion, the Act creates the opportunity for substantial tax savings for farmers who have been contemplating purchases of equipment or other property for the trade or business. Bonus depreciation will only be available for property that is purchased in 2010, but the increased Section 179 expense deduction will be available for property purchased in 2010-2011. Farmers also should consider if other tax-saving provisions of the Act may be applicable to their business.
David P. Webb and D. Nathan Smith are tax attorneys with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in its Jackson, Miss., office.