The tax filing season is well underway with deadlines coming and going and increased timing pressures. With the season comes look-backs and look-forwards. One of the biggest tax items affecting nearly every farm operation in 2018 and beyond is the IRC Section 179 Expense. The federal government has been generous with this deduction; however, Iowa has reduced the election to a mere $25,000. Let’s review this issue as well as a “glitch” you may need to be aware of. Thank you Kristine A. Tidgren from the Center for Agricultural Law and Taxation at Iowa State University, for continued clarification of tax matters affecting those in Agriculture. The following is a summary of an article she recently made available.
Section 179 has long been an important tool for farmers. It helps with ever-difficult cash flow struggles, lowers their marginal effective tax rate, and lessens record keeping requirements associated with depreciation.
Historically, Iowa has conformed to federal IRC § 179 provisions. Last year, in light of serious budget concerns, Iowa decided not to couple with the increased 179 election made permanent by the 2015 PATH Act. Consequently, during the 2017 filing season (2016 tax year), taxpayers and their preparers for the first time battled with a $500,000 federal 179 deduction and a corresponding $25,000 Iowa 179 deduction. The thresholds for when the deduction phased out were very different as well. This led some Iowa farmers to face significantly higher Iowa tax liability than federal.
For example, John purchased a $300,000 combine. He took a 179 deduction for the full cost on his federal return. The cost of the combine exceeded the Iowa 179 $200,000 phase-out limit. He could not take a 179 deduction on his Iowa return. John had to begin depreciating the combine over a seven-year period on his Iowa return.
For taxpayers like John, this was a difficult and unexpected scenario even though it was primarily a timing issue. He would eventually get to recover his cost, while his cash flow suffers, and he maintains two depreciation schedules, at least.
For other taxpayers, the uncoupling of Iowa’s 179 means that they are denied cost recovery altogether. This result, which occurs with taxpayers owning interests in entities, is a glitch rather than a reasoned policy decision.
Consider this example:
Sue is an Iowa taxpayer with ownership interest in three farming partnerships. Each partnership placed $200,000 of property in service in 2016 and passed a $20,000 § 179 deduction to Sue. Sue can take the $60,000 federal § 179 deduction, but deduction is limited to $25,000 for the Iowa § 179 deduction. Here, the $35,000 in excess of the Iowa limit cannot be carried forward. In this case, Sue also cannot depreciate the excess amount using MACRS, even if the partnerships provide proper depreciation information to her. To make matters worse, Sue’s basis in her partnership interests is reduced by the amount of the section 179 deduction passed through from those partnerships, even though she was not allowed to claim the full deduction on her Iowa return. And there is no provision for restoration of the basis when the partnership interests are sold.
Potential avoidance of this is one preparer or coordinated preparers. Do not take 179 at all. Such coordination is not always possible.Having one preparer for all entities, or coordinating preparers, may avoid this glitch in the law, however, it may not be possible, An alternative might be to not take the 179 election at all. Not taking it at all may not be the right tax result for all shareholders/partners/members. Entirely forfeiting a federal benefit is not desirable. Other partners may not be in a similar situation so they will lose immediate benefit to help Sue.
Non-Iowa S Corporation owners and fiscal year entities have other concerns with this Iowa “glitch.”
Iowa is considering some adjustments to the 179 election limits; however, they are still not near the deduction from 2015 from 2015 or the deductions and phase-out limits in the new tax bill. Keep in touch with your tax professional when analyzing the tax benefits of your equipment purchases. You will get your depreciation deduction on your Iowa return in most cases. It will just take time.
Good luck as you head into the spring planting season while we continue to do what we can to feed the world. Here at TD&T we would like to help you through the tax problems and glitches written into tax law. Give us a call to answer your IRC Section 179 questions.
Susan Voss, CPA, one of the heads of our Ag team, provides the next installment in her series on helping farm families understand and respond to changes in farming and agribusiness.