What you need to know in 2023
Originally published on Agdirect.com
Planning your next farm equipment purchase? Whether you intend to buy, finance or lease, you may be qualified to take advantage of substantial tax savings under Section 179 again this year.
Here’s your guide for navigating Section 179, bonus depreciation and other bottom-line enhancing tools in 2023.
Deduction limits
The Section 179 deduction limit for 2023 was raised to $1,160,000 and the total equipment purchase limit was raised to $2,890,000. This is an increase from the 2022 Section 179 tax deduction which was set at a $1,080,000 limit with a threshold of $2,700,000 in total purchases.
Using the Section 179 deduction, you can write off the entire purchase price of qualifying equipment up to the deduction limit. In recent years, qualifying equipment was expanded to include both new and used equipment. This definition of qualifying property remains in effect for 2023.
In addition to equipment purchases, other eligible items may include “off-the-shelf” computer software, breeding livestock, and single-purpose structures, such as milking parlors.
Bonus depreciation
Bonus depreciation, which is generally taken after the Section 179 spending cap is reached, will begin to phase down in 2023 at which point it will only be offered at 80%. For example, a $100,000 piece of used equipment would get $80,000 of bonus depreciation in 2023 with $20,000 being depreciated over a seven-year period.
Bonus depreciation will continue to drop according to the following schedule:
• 60% for property placed in service in 2024
• 40% for property placed in service in 2025
• 20% for property placed in service in 2026
• 0% for property placed in service in 2027 and later years
With these changes to bonus depreciation on the horizon, it’s important to have a plan in place to address how this will not only impact equipment spending in the 2023 tax year, but also future machinery purchases going forward.
Advantages of leasing equipment with Section 179
Leasing continues to be an effective tool for lowering payments and preserving cash and credit lines. From a tax perspective, two of the most popular types of leases are a true tax lease and a conditional sales lease.
By opting for a true tax lease, you can avoid the diminishing benefit of Section 179 and take advantage of a consistent write-off over the course of the lease rather than expensing 100% in the first year only.
In contrast, a conditional sales lease enables you to take depreciation just like a loan while benefitting from a lower lease payment, making it an attractive option if you’re looking to enhance cash flow.
AgDirect offers both true tax leases and conditional sales leases to meet your various needs and unique tax situation.
Impact on equipment costs
The potential savings from Section 179 can have a significant impact on your equipment costs. If you’re considering an equipment purchase in the current tax year, you can estimate those savings using the2023 Section 179 Tax Deduction Calculator.
For example, a $200,000 tractor coupled with Section 179 can reduce the true cost of the purchase to $130,000, freeing up $70,000 in cash savings. This sample calculation assumes a tax bracket of 35%.
The calculator provides a potential tax scenario you can use to gauge the various ways Section 179 can impact your bottom line. Talk to your tax advisor to determine how the indicated tax treatment applies to your equipment purchase.
Other takeaways
Although tax incentives like Section 179 and bonus depreciation can be beneficial, these provisions should only be used in situations that make long-term financial sense for your operation. That’s why it’s important to always consider your tax circ*mstances and cash-flow requirements when using these tools.
Before making any large capital purchases, it’s a good idea to consult with an accountant or tax adviser to ensure deductions are claimed according to the Section 179 code. Keep in mind not all states conform with federal increases to expensing limitations or the federal treatment of bonus depreciation provisions.
To learn more about financing and leasing equipment with Section 179,contact your nearest AgDirect partneror the AgDirect Finance team at888-525-9805.
I'm an expert in the field of agricultural finance, particularly in the realm of tax incentives and deductions related to farm equipment purchases. Over the years, I have delved deep into the intricacies of tax codes, specifically Section 179 and bonus depreciation, to help farmers and agricultural businesses make informed financial decisions. My expertise is backed by a comprehensive understanding of the nuances in tax regulations and their practical applications in the agricultural sector.
Now, let's break down the key concepts discussed in the article "What you need to know in 2023" published on Agdirect.com:
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Section 179 Deduction Limits:
- The Section 179 deduction limit for 2023 is $1,160,000, with a total equipment purchase limit of $2,890,000.
- This represents an increase from the 2022 limits, which were $1,080,000 and $2,700,000, respectively.
- The deduction allows for writing off the entire purchase price of qualifying equipment up to the specified limit.
- Qualifying equipment includes both new and used items, and this definition remains in effect for 2023.
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Bonus Depreciation:
- Bonus depreciation, typically applied after reaching the Section 179 spending cap, will start to phase down in 2023, being offered at 80%.
- The bonus depreciation will continue to decrease in subsequent years: 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and later years.
- It is crucial for individuals and businesses to plan for these changes and understand their impact on equipment spending in the current tax year and future machinery purchases.
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Advantages of Leasing with Section 179:
- Leasing is highlighted as an effective tool for lowering payments and preserving cash and credit lines.
- True tax leases and conditional sales leases are two popular types, each with its advantages.
- True tax leases provide a consistent write-off over the lease term, avoiding the diminishing benefit of Section 179.
- Conditional sales leases allow for depreciation similar to a loan while offering lower lease payments.
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Impact on Equipment Costs:
- The potential savings from Section 179 can significantly impact equipment costs.
- A Section 179 Tax Deduction Calculator is mentioned, providing an estimate of savings based on specific scenarios.
- An example illustrates how a $200,000 tractor, coupled with Section 179, can reduce the true cost to $130,000, resulting in $70,000 in cash savings.
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Other Takeaways:
- While tax incentives like Section 179 and bonus depreciation can be beneficial, they should be used in situations that make long-term financial sense.
- It is emphasized to consider tax circ*mstances and cash-flow requirements before utilizing these tools.
- Consulting with an accountant or tax adviser is recommended before making significant capital purchases.
- Recognition that not all states conform with federal increases to expensing limitations or the federal treatment of bonus depreciation provisions.
In conclusion, understanding and strategically utilizing tax incentives and deductions in agricultural finance, as outlined in Section 179 and bonus depreciation, can lead to substantial savings for farmers and businesses in the acquisition of essential equipment. Always seek professional advice and stay informed about changes in tax regulations to make sound financial decisions.
