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Section 179 Deductions

Will the IRS Section 179 tax deduction be restored to $500,000?

Published on 12/2/2015

Whether or not the Section 179 tax deduction will be restored is a common question for both crop producers and machinery dealers as 2015 draws to a close.

In mid-December of last year, Congress acted to restore the Section 179 deduction to $500,000 from its default level of $25,000, a move many observers saw as an effort to stimulate the economy through bigger-ticket, year-end business purchases. It’s a critical factor for many producers looking to replace or add new farm machinery and equipment. Now, as the end of the year beckons for 2015, efforts to restore the Section 179 deduction, as well as bonus depreciation, are again underway in Washington, D.C.

“As far as what we’re hearing, a lot of dealers are waiting for it. The point of it is to get people to purchase and get tax incentives,” says Chris Kayton, AgDirect® Territory Manager for California and Arizona. “There’s always a mad rush at the end of the year.”

Section 179 Uncertainty

In general, the expectation for a return to the $500,000 level for bonus depreciation under IRS Section 179 ranges from “50-50” to “fairly optimistic.” Regardless of whether that happens, though, producers have options to maintain tax incentives on equipment purchased by the end of the year and beyond, says Amy Weum, agricultural leasing specialist with AgDirect.

The primary objective of claiming a Section 179 deduction is to have a larger tax write-off at the year’s end, but there are other ways to realize that same financial benefit even if the tax provision isn’t extended retroactively to cover all of 2015 as it was a year ago. A “tax lease” is signed with tax incentives in mind. Even if the larger Section 179 amount isn’t restored, you can still glean similar financial benefits with tax-deductible lease payments.

“A true ‘tax lease’ will be an ace-in-the-hole right now and can help buffer against uncertainty,” Weum says. “Some producers want to accelerate their write-off as quickly as possible. They will want to consider a two- or three-year true tax lease to bump up their payment for a bigger write-off.”

Other Financing Opportunities

But, even with the amount of the Section 179 deduction up in the air, producers don’t have to worry about missing out on a good financing deal between now and the end of the year if a tax lease isn’t in the cards, Weum says. Beginning in early November, AgDirect territory managers and machinery dealers were already seeing buyers who typically utilize the Section 179 deduction purchasing new iron. But even if the deduction is not extended at the $500,000 level, those producers and others will still see “win-win” financing opportunities.

“In addition to a true tax lease, we can also offer a conditional sale with the same residual. By doing that, they can keep the same payment and same residual, but the customer takes depreciation rather than a payment deduction. Another option is a purchase leaseback,” Weum says. “If a producer financed a couple tractors and a combine earlier this year with John Deere, for example, on zero percent financing for six months, we can finance those into leases and roll them into whatever our current rate is.

“This is their chance to lock in a fixed lease rate. Some are thinking ahead and taking that free interest waiver and rolling it over to AgDirect when it’s done. It’s kind of a win-win. The customer ends up with lower payment and can take advantage of the discounts followed by a low fixed rate,” Weum adds.

More Year-end Financing Variables

While both Weum and Kayton expect a lot of year-end machinery buying regardless of the Section 179 deduction status, there are a couple of variables that could influence those overall numbers.

First, the machinery marketplace looks much different right now compared to a year ago. There’s a lot more inventory on dealer lots versus a year ago, especially in the Corn Belt, and Weum says that could up the ante for dealer incentives offered to producers looking to add machinery.

“I think the amount of equipment available is not as tight as in prior years; when you look at the used segment, the market is flooded,” she says. “On the new side, I’m not sure if people are waiting until the end of the year, but they really have their choice because dealer lots are full.”

Though this inventory situation could push more sales in general, the variable underpinning is that inventory – and continued sluggish grain profits – could keep some producers on the sidelines who would ordinarily be looking to purchase machinery regardless of the status of Section 179 tax deductions. And that could have some major ripple effects in machinery inventory and the marketplace in general through the end of 2015 and beyond.

“I think some producers who would normally be trading are going to keep running their old machinery. Some dealers know these producers who have been trading every two years for the shiny new stuff. They then typically know who their buyer’s going to be for that machinery,” Weum says. “I’ve talked to dealers who have put together special programs to clear out inventory and make room for newer models coming in – including rate buy downs, higher residual programs – anything they can do to attract buyers at the end of the year. Buyers can probably get a good deal.”

Consult with a tax professional for advice on leasing options and tax issues.

All leases are subject to approval. Some restrictions may apply.

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Agriculture is constantly evolving, which is why AgDirect® works to help you make the right decision for your operation when it comes to financing ag equipment.

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