Successful Farming - - MACHINERY INSIDERª - By Austin Duer­feldt, Univer­sity of Ne­braska Econ­o­mist

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.


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.


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 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.


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.

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