TRADING HP. WITHOUT LIKEKIND EXCHANGE
In the past, you probably didn’t give it a lot of thought when you were in the market to replace horsepower. You bought a different tractor, traded in or sold your old tractors, and then told your accountant what you did. The recent Tax Cuts and Jobs Act has changed that process just a bit. The change comes into play when you speak with your accountant.
Before the tax law change, the new tractor was added to the depreciation schedule with a basis of cash paid plus the basis of the old. Under the new law, the new tractor is added to the depreciation schedule with a basis of cash paid plus trade-in value of the old tractor.
So what’s the difference? Let’s walk through it with some numbers.
OLD ACCOUNTING WITH LIKE-KIND EXCHANGE
For this example, let’s look at buying a new tractor and trading in your old tractor. The new tractor being purchased was negotiated to have a purchase price of $120,000. The dealer has agreed to allow $20,000 on the tractor you want to trade in.
On your depreciation schedule, the old tractor had $5,000 of basis left on it.
Starting from the top with the old tractor, there would be a gain on a sale of $15,000 ($20,000 trade-in value minus $5,000 basis).
With the old Like-Kind Exchange rule, that amount was ignored. The new tractor was put on the depreciation schedule with a basis of $105,000 ($100,000 cash plus $5,000 old tractor basis). That $105,000 would be available to depreciate.
NEW ACCOUNTING WITHOUT THE LIKE-KIND EXCHANGE
Now let’s look at the same situation using the new tax law, starting with the old tractor. Without LikeKind Exchange, the $15,000 of gain will have to be recognized on the tax return.
The new tractor will be recorded on the depreciation schedule at the full purchase price. In this example, that would be $120,000 ($100,000 cash plus $20,000 tradein). That $120,000 would be available for Section 179, bonus, or regular depreciation.
THE IDEA BEHIND THE CHANGE
The end result is a recognized gain-loss on the old asset with depreciable basis of the new asset for the full purchase price. The Tax Cuts and Jobs Act passed in 2017 implemented some changes to help level out the process.
In exchange for requiring the recognition of the gain-loss, the new tax bill provides the ability to take more depreciation faster.
The first change is with Section 179 of the IRS code. The new tax bill increased the S179 deduction to $1 million with a phase-out threshold amount of $2.5 million.
The second change is with depreciation. Bonus depreciation is now available for new and used assets with a depreciable life of 20 years or less. The bonus depreciation will also be available through 2022 at 100%, and will then begin to drop 20% each year until it reaches 0% after 2026. In short, for the first few years, you will have unlimited depreciation capabilities given that the bonus depreciation has no cap.
WHAT ABOUT LOCAL PERSONAL PROPERTY
When I talk about this change in meetings with farmers, participants are quick to pick up on the possible local tax implications.
If we’re required to submit personal property tax information each year to your local county tax assessor, then the new way of calculating depreciation on machinery purchase will result in an increased basis of the new tractor. That is one down-side of this new method.