Great new tax breaks . . . and pitfalls
As agricultural tax experts dig into a much-criticized fiscal-cliff deal, they're finding plenty that will benefit farmers and ranchers.
Estate planning has more certainty, now that the Taxpayer Relief Act makes the 2012 level of estate tax exemption permanent and indexed for inflation, said David Marrison, an Extension educator who is Ohio State University's Income Tax School interim director.
"Permanent is the big word. That gives people a lot more security when they sit down with their estate planning professional," Marrison told Agriculture.com Tuesday.
As has been widely reported, the tax rate on the portion of an estate that is still taxed goes up from 35% in 2012 to 40% permanently. But the exemption remains at $5 million, indexed for inflation, which made it $5.12 million in 2012. The unused portion of that exemption from gifts and estate taxes also can be transferred to the surviving spouse, putting the maximum potential tax savings at more than $10 million per couple.
You may also be able to enjoy some tax savings while you're still alive if you purchase machinery or make other capital investments in 2013. The Taxpayer Relief Act increases and extends the Section 179 write-off from the $139,000 that most expected for 2012 to the old 2010-2011 level of $500,000 for 2013. And it retroactively reinstates that expense method of depreciation to $500,000 for 2012. Before the fiscal-cliff deal, Section 179 expensing was set to drop to $25,000 for 2013. The new law puts that off for another year, reverting to $25,000 in 2014.
"However, as always, time will tell," Marrison wrote in a summary of the Taxpayer Relief Act coauthored by Chris Bruynis, OSU Extension assistant professor.
"I think this caught most people off guard," Marrison said. Some tax experts had speculated that Section 179 expensing might be bumped up to $250,000 for 2013, he said. Few expected it to be as generous as $500,000.
Their article, posted on the Ohio Ag Manager website, also notes that the bonus depreciation was extended in the last-minute deal.
"This legislation also extended the special 50% special depreciation allowance, also known as bonus depreciation, through the end of 2013. The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service. Bonus depreciation is now scheduled to be eliminated for the 2014 tax year," says the article, "Taxpayer Relief Act of 2012 -- What Does it Mean to Ohio Farmers?"
Marrison said that many farmers won't be able to take advantage of the increased Section 179 expensing for 2012, since they didn't know in advance that they could rapidly write off such a high level of purchases. A few may, however.
"There's some farms that were using the Section 179, 50% depreciation and just carrying it over" onto a regular depreciation schedule.