Montana State University

Summary of tax law changes and a new tax information resource for agricultural operations

January 25, 2011 -- MSU News Service

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Several provisions of H.R. 4853, called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, warrant planning time with your tax accountant prior to finalizing 2010 tax returns. This bill was passed by the Senate on December 15 and the House on December 16.

Final interpretations of some provisions in this bill are pending, while other changes and extensions of previous legislation are straightforward. A concise summary of these changes can be found at: http://www.calt.iastate.edu/taxdealreached.html.

Agricultural operations should contact their tax accountant to review the "Bonus Depreciation" provision of this legislation. Of concern is the provision in this legislation which specifies that for qualified assets, with original use of an asset by the taxpayer which was placed in service after September 8, 2010 through December 31, 2011, 100 percent bonus depreciation is available. For 2012, bonus depreciation would be limited to 50 percent of the qualified property's adjusted basis. The bill also specifies that a taxpayer could elect to accelerate some AMT credits in lieu of bonus depreciation for tax years 2011 and 2012. A Practitioner Note, below, indicates there may be no election for how an individual producer would like to treat the bonus depreciation. It may be that qualifying assets purchased during specific time periods, even in 2010, are automatically subject to this new Bonus Depreciation rule and that 100 percent of the value of these assets must be claimed as deprecation regardless of the tax management needs of individual operations. Since this legislation has just been passed, implementation rules have not been finalized, but it may be prudent to contact your tax advisor and see if this provision may impact your operation.

Practitioner Note: 100 percent bonus is not available for assets placed in service before September 8, 2010. I.R.C. 168(k)(5) specifies as follows: "In the case of qualified property acquired by the taxpayer (under rules similar to the rules of clauses (ii) and (iii) of paragraph (2)(A)) after September 8, 2010, and before January 1, 2012, and which is placed in service by the taxpayer before January 1, 2012 (January 1, 2013, in the case of property described in subparagraph (2)(B) or (2)(C)), paragraph (1)(A) shall be applied by substituting "100 percent" for "50 percent." Thus, it appears that there is no ability for "elective" treatment for prior acquisitions. The provision is also based on "acquired," not "placed in service." So, a taxpayer that buys an asset before September 8, 2010, but puts it in service afterwards, the 50 percent rule applies. Likewise, the only elective option for post September 8, 2010, acquisitions is regular Modified Accelerated Cost Recovery System (MACRS).

In addition to the Bonus Depreciation change, the Section 179, first year depreciation expense election is set at $125,000 for 2012, with the phase-out beginning at $500,000 on qualified property. Currently, this limit is scheduled to return to $25,000 beginning in 2013. Some of the MACRS depreciation rules have been made retroactive for 2010 and extended through 2011.

Some other provisions in this legislation include:

Restored retroactively for 2010 and extended through 2011 are enhanced contribution limits and carry-forward periods for contributions of appreciated real property (including partial interests (i.e., easements)) for conservation purposes.

Several energy-related provisions were extended. The $1.00/gallon production tax credit for biodiesel and the $.10/gallon producer credit for small agri-biodiesel producers is extended through 2011. In addition, the $1.00/gallon production tax credit for biomass-created diesel fuel is extended through 2011. The ethanol tax credit subsidy has been extended through 2011 along with the $.54/gallon tariff on imported ethanol and the $.2267 tariff on ethyl tertiary-butyl ether (ETBE). The alternative fuel tax credit is also extended through 2011 at $.50 per gallon, but "Black Liquor" is not eligible for the credit. This legislation also extends the credit for manufacturers of energy-efficient residential homes and the I.R.C. 25C credit for energy-efficient improvements to existing homes through 2011.

While the employer portion of the FICA tax remains at 6.2 percent, the employee portion declines to 4.2 percent on earned wages up to $106,800 for 2011 only. FICA tax rates for people who are self-employed also decline from 12.4 percent to 10.4 percent on self-employment income up to $106,800 for 2011.

This legislation also extends the provision that allows premiums for mortgage insurance to be deducted as interest that is "qualified residence interest" for taxpayers with adjusted gross income (AGI) of $110,000 or less through 2011.

A new tax information website for agricultural operations is also available at: http://ruraltax.org/. This site was cooperatively developed by 16 Extension Professionals throughout the U.S., and includes fact sheets on agricultural income issues, information which incorporates both tax and farm management issues, samples of complete federal tax returns and links to other tax resources.

Duane Griffith, Extension Farm Management Specialist, (406) 994-2580 or griffith@montana.edu