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HADDONFIELD, N.J. (DTN) -- Drainage contractors like Roger Wenning of Greensburg, Ind., have enjoyed a boomlet right alongside their farm customers the past five years. In fact, so many farm clients wanted drainage tile installed after the drought of 2012, Wenning employed up to nine full-time and part-time employees nonstop between harvest and planting to keep pace with demand. "Good contractors are booked more than a year in advance out here," he said between jobs this week.
Compounding worries about lower 2014 farm incomes are concerns that generous tax incentives that can save farm businesses hundreds of thousands of dollars a year are set to expire Dec. 31. That prospect is recalibrating future farm investments and frazzling manufacturers, dealers and contractors.
"Last year we were worried about going over the tax cliff, but this year it looks more like farm businesses will face a tax mountain," said Andy Biebl, a CPA with CliftonLarsonAllen LLP in Minneapolis.
At the center of concern is the expiration of Sec. 179 and bonus depreciation rules. With grain storage systems topping over $2 million, combines approaching $300,000 and tiling sometimes running up to $1,500 per acre, the end of front-loaded depreciation could be a shock to U.S. agriculture in the years ahead.
To kick start the economy, Congress liberalized deductions and depreciation for capital equipment multiple times since 2008. In 2013, the maximum Section 179 deductions are $500,000 and begin to phase out dollar-for-dollar once you purchase $2 million of new and/or used equipment. What's more, a 50% bonus depreciation applies to new equipment, so you can write off an extra $300,000 on qualified buys of $600,000.
The net effect is that Uncle Sam has heavily subsidized capital purchases -- a boon for manufacturers, contractors and dealers -- and a huge incentive for farmers who needed to shelter a string of record farm incomes this decade.
Someone who spent $1.1 million on new equipment this year with a combined state and federal tax rate of 40%, could write off 77% of their cost in year one, points out Jack Selzer, an attorney with Seigfreid, Bingham PC, legal counsel to the North American Equipment Dealers Association. In the process, the buyer would save about $337,148 on their 2013 taxes and a total of $440,000 over seven years.
All that is about to change. Sec. 179 limits are set to revert to pre-2008 levels next year, or a mere $25,000. What's more, both Biebl and Selzer doubt Congress will renew that bonus depreciation. So unless Congress acts, the same $1.1 million purchase in 2014 would yield only $62,876 in first-year tax savings, Selzer notes, or a paltry 14% of the investments' total cost.
Another way to look at it is the grower would need to come up with an extra quarter-million dollars of cash to make the purchase in 2014 vs. 2013, so tax change alone is likely to price some customers out of the purchase.
"Farmers love to take advantages of tax benefits to pay the minimum allowed under the law," said Selzer. "The bottom line is this change is like weaning yourself off medication -- if you do it all at once, it could be very dramatic."