November and December 2015 were two important months for tax laws that impact farmers and business owners, so if you fall into either category, it’s important that you understand recent changes and discuss them with your tax advisor.
Two existing regulations were altered, and as a result, things we deduct on farm and business returns, and the ways in which we deduct them, are permanently changed. Before we explain, let’s give a bit of background.
In January 2014, a set of rules called the Tangible Property Regulations (TPRs) went into effect on tax returns in all industries.
These regulations provided new requirements to determine whether a cost is immediately deductible as an expense, or is required to be deducted over a period of years, via depreciation. Under the TPRs, every single repair cost must be evaluated under a series of rules to determine its appropriate tax treatment – these rules were completely new for 2014 tax returns. However, a safe harbor exists that allows any expense under $500 to be immediately deducted without any testing requirements. This is an important safe harbor, because testing repair items places a significant burden on taxpayers and tax professionals alike, so relief from testing anything under $500 reduces the burden a bit. (Note: if your business files what is essentially an audited financial statement with a governmental agency, the threshold is $5,000 – discuss this with your tax professional if you think it impacts you.)
On Nov. 24, 2015 the IRS released Notice 2015-82, which increased the threshold present in this safe harbor, from $500 to $2,500. That means any business or farm expense under $2,500 can be deducted immediately, without being depreciated. This change goes into effect for years beginning after Jan. 1, 2016 – but the IRS has provided guidance that makes the rule available for 2015 tax returns, as well. Discuss this regulation with your tax professional and make sure its implications are considered on your tax return.
Also important to note for the coming filing season and beyond is that Congress, on Dec. 18, 2015 signed into law a bill that expands the annual Section 179 deduction limit to $500,000 – permanently! If you’ve been farming for long, you probably have a basic understanding of Section 179, but in case you don’t, it’s a tax code created to help businesses, by allowing them to deduct the full amount of the purchase price of equipment and breeding stock immediately in the year it’s purchased, rather than over a period of years through depreciation.
Section 179 has long provided farmers with a key planning tool, because taxable farm profit can be lowered through major purchases.
In the past, Section 179 rules have expired annually and been retroactively extended by Congress, which creates a bit of a year-end guessing game for farmers when it comes to how much expense they can get under Section 179. This recently passed bill makes an annual $500,000 Section 179 limit permanent (it’s also indexed for inflation), and removes some yearly uncertainty, which is great news. Discuss Section 179 with your tax professional and make sure you understand all the benefits and consequences of relying on it to save tax.
Adam Wolfe, CPA is the Partner & Tax Director of Bobby Medlin, CPA and works in the firm’s Lake Ozark branch.
