Is it time for you to get patriotic while considering new machine purchases? The changes made in the U.S. Tax Code encourage new purchases by all businesses to get the economy moving. In fact, one could almost believe it would be patriotic to purchase more machinery, considering the changes made.

Starting in 2003, changes in depreciation schedules allow huge tax breaks for all new machinery purchases. It has been stated by our leaders that the purpose of these tax breaks is to stimulate the economy, and it seems to be working, given the recent increases in the stock markets. If your wife or business partners are dragging their feet on that new purchase of equipment you have been dreaming about, you might "wave the flag" on the decision and claim it is our duty to help improve the economy!

Seriously, is it time to trade combines anyway?

Maybe your needed purchase is not a combine. I use that example because it is perhaps the most expensive piece of equipment most farmers own, and combines have many moving parts that sometimes are difficult to service. With the poor farm economy the last few years and the increasing commodity prices recently, many farmers probably have not updated that piece of equipment. Some pent-up demand for replacement of a combine makes it an easy target for this discussion. Perhaps it is a tractor or tillage tool that would increase your productivity if it were purchased while using the new tax credits.

Either way, and what ever the color the equipment is painted, investing in new equipment this year and next could save a lot of tax money, as well as stimulate the economy. If the economy is stimulated by these purchases, you could well be buying Red, White, and Blue equipment as you do your patriotic duty to jump-start our economy.

What is the 179 deduction, and what can it do for you?

Most of us know the capital gains tax rate has been reduced, as well as the other tax schedules. From a few of the questions asked on the farm discussion groups at Agriculture Online, it would appear some do not understand the 179 election and how it has increased.

For 2003 to 2005, the 179 deduction has increased to a maximum of $100,000, up from $20,000 in 2002. The 179 election allows one to deduct fully, all in one year, purchases up to the maximum allowed. This means if you buy a new combine that costs $200,000 for example, that $100,000 can all be written off your Schedule F in the first year the combine is put into service.

But, it does not stop there. You can also elect to deduct half of the next $100,000. All those deductions are limited by the amount of income you claim in the year of purchase. If you do not earn enough, your deductions are limited. For other businesses, the deductions are available, also; I mention Schedule F because I assume you readers are farmers.

Perhaps your income was not large enough to claim the full deduction? Not to worry, you can deduct the rest in future years. Is it always a good idea to claim the full deduction? No, perhaps in some situations in might be better to even out the deductions to other years. Most tax advisors strive to have even tax payments throughout your working years to maximize the benefits of other possible deductions. Sometimes having too much tax in one year and too little in the next could result in more taxes paid in the two-year period combined. The other philosophy of paying taxes claims that one should pay the least amount of taxes in any year, as rates may go up in future years. You are the one who must decide your tax plans for your operations.

Should we just rush out to buy any equipment to be patriotic?

What a silly statement, just buy any equipment! Any farmer knows this article is written partly tongue-in-cheek. We never buy equipment that would not make us more productive just for tax breaks. We must have a justifiable reason for such a purchase. If rolling machinery is not needed, how about farm tile drainage? Using 179 deductions can make that very profitable investment much cheaper! Just remember, becoming more productive means more income, which means more income tax in the future! That is the kind of problems we all would like to have, more income!

See your tax advisor!

I offer these suggestions for those who are not aware of the possibilities. Be sure to see your tax advisor to see if they work for you. Some might think this is not patriotic, as it almost seems you are evading taxes. Just remember, it is our duty to pay all the taxes we owe, but from time-to-time, our governments allow us breaks to stimulate buying.

Do your patriotic duty now; go out and buy a new truck, tractor, tillage equipment, or combine! Uncle Sam will thank you by giving money back on your income tax. You too, will enjoy Red, White, and Blue equipment in your machinery shed!

-©John Dappert 2004M