A ‘BAD NEWS, GOOD
NEWS’ SCENARIO IN
THE WORLD OF TAX
I
n the past, come tax time, Section 1031
(re: like-kind exchanges) would come
in handy to many a taxpayer operating in
the agribusiness sector. This favorable tax
treatment used to apply to real estate and
personal property. Unfortunately, that’s no
longer the case.
With the Tax Cuts and Jobs Act (TCJA) in
full effect, personal property (i.e., tractors,
combines, farm equipment, etc.) are no longer
eligible for the like-kind treatment. Moving
forward, like-kind exchanges will be limited
to real property and equipment or livestock
“trades” will be treated as taxable events.
DEFINING THE NEW
SECTION 1031
Section 1031 has always been a great tax
planning tool. Generally speaking, it allows
you to defer taxes on the sale of property
and reinvest your capital gains in similar
property of equal-or-greater value. As you
can imagine, with capital gains tax rates
soaring as high as 20 percent (depending on
your taxable income and filing status), the
decision of whether or not to defer your tax
payment by invoking Section 1031 is a pretty
easy one to make.
The good news is that Section 1031 can still be
used on real property transactions. That means
if you currently own a piece of farmland that
isn’t as productive as you would like, you can
sell the land and roll the gains over into new
farmland, the purchase or construction of a
new building or even into cost of improving
your existing property, all while continuing to
defer the tax. But just because the like-kind
exchange can no longer be used on that shiny
new tractor, that doesn’t mean you should put
off the purchase. In fact, there are other more
valuable provisions to explore in the TCJA
like, for example, Section 179.
SAY HELLO TO THE
NEW SECTION 179 +
BONUS DEPRECIATION
While you might be a little disappointed
to learn about the Section 1031 changes,
you’ll likely sing a new tune when taking
a look at the new Section 179 and bonus
depreciation provision included in the TCJA.
In an effort to incentivize businesses to buy
equipment and invest in their own growth
and sustainability, the TCJA expanded the
Section 179 deduction, which now allows
business owners to write off 100 percent of
their new or used equipment purchases (up
to $1 million) in the year the equipment was
purchased. In addition, businesses can take
a 100 percent first-year bonus depreciation.
As a result, more businesses are using this
method to purchase the equipment they need,
when they need it.
Section 1031 Gets
A Facelift, But
Section 179 & Bonus
Depreciation Is A
Game-Changer
this to include all equipment as long as it’s
“new to you,” which means new and used
equipment qualify for bonus depreciation.
When applying these tax rules, Section 179 is
applied first, followed by bonus depreciation.
Imagine that your total equipment purchase
in 2018 was $1.15 million. When filing
your 2018 taxes, Section 179 allows you to
write off $1 million. Then, you can take the
100 percent bonus first-year depreciation to
address the remaining $150,000. That would
make your total first-year deduction $1.15
million, which, when multiplied by a 35
percent tax rate, makes the actual cost of your
equipment purchase $747,500 – a savings of
$402,500!
TALK TO YOUR TAX
TEAM
As you can see, tax reform has resulted in a lot
of changes, many of which will impact your
bottom line. Our tax team has spent countless
hours analyzing the changes and working
out strategies that will help our clients come
out on top. Give me a call to talk about
your tax planning strategy or visit our content
library at www.reacpa.com/insights for
additional resources.
In the past, bonus depreciation has only
applied to new equipment. The TCJA changed
by: Joel Yoder,
CPA, Manager
212 N. Washington St.
Millersburg, OH 44654
330.521.4536
[email protected]
Rise & Shine • Fall 2018
5