2013 depreciation and accelerated depreciation in Minnesota
Section 179 depreciation
New legislation temporarily extends a higher section 179 deduction through the end of tax year 2013. For calendar year 2012 the maximum section 179 deduction was $500,000. The investment limit (for qualifying property) was $2,000,000.1 Qualifying property includes: breeding livestock, machinery, single-purpose agricultural structures (hog confinement buildings), and drainage tile.
For tax year 2013, the maximum section 179 deduction is $500,000 with an investment limit of $2,000,000.
The permanent ceiling for an IRC Section 179 deduction after 2013 is $25,000, with the investment phase-out beginning at $200,000.2
Section 179 may be taken on qualifying property regardless of whether the asset is new or used. However, the asset cannot be purchased from a related party (lineal descendant).
Modifying section 179 depreciation
The provision permitting a taxpayer to amend or irrevocably change a Section 179 election with the consent of IRS was extended for 2013.3
The Section 179 election is made on an item by item basis for qualifying property by completing Part I of Form 4562. A taxpayer can make or revoke the expensing election on a timely filed amended return. However, once the election is revoked, it cannot be remade.
A section 179 election made on an amended return must specify the item of Section 179 property to which the election applies and the portion of the cost of each item to be expensed. If a taxpayer elected to expense only a portion of the cost of an item for a particular taxable year (or did not elect to expense any portion of the item), the taxpayer may file an amended return and expense any portion of the item not previously expensed. Any increase in the amount expensed under Section 179 is not treated as a revocation of the prior election for that year.4
See your tax preparer for details specific to your situation.
The new tax law (contained in Fiscal Cliff Legislation) extends the 50% special depreciation allowance (Bonus depreciation) one year for qualifying property purchased and placed in service during tax year 2013.5 Under this provision only new assets qualify (the language specifically says, "first use"). Generally, qualifying assets include tangible property not exceeding 20 years life (including barns and machine sheds which are not eligible for section 179).
Eligible property also includes: purchased computer software, water utility property, and qualified leaseholder improvement property.
Bonus depreciation is allowed under the alternative minimum tax (AMT).
The Farmer's Tax Guide6 (Publication 225) states that assets must be "placed in service" before any business deductions are to be taken.....which includes section 179 and bonus depreciation.
Ordering rules for accelerated and regular depreciation used in combination are as follows:
- Section 179
- Bonus Depreciation (Additional first year depreciation
- Regular depreciation
Minnesota law—Section 179 and bonus depreciation
Minnesota has not fully adopted the Section 179 provision as modified in federal tax law and is not expected to do so. Currently, Minnesota tax payers must add back 80 percent of the increased difference between the 179 expenses allowed federally and the amount that would have been allowed under the Internal Revenue Code in effect prior to 2003. Minnesota's limitation for expensing newly acquired 179 assets is $25,000 rather than the federal amount of $500,000 in 2013.
Taxpayers will have to re-compute federal Schedule 4562 for state purposes in order to figure the add-back amount. In each of the five years after the add-back is made, the taxpayer is allowed to subtract 20 percent of the remaining unclaimed amount.
This limitation applies to all business entities. In a partnership or S-corporation, the pass through to a partner or shareholder is first limited at the entity level. For example, if a partnership has a Section 179 expense of $100,000, then the Minnesota flow through is limited to $25,000.
Minnesota has not adopted the federal bonus depreciation rules. Currently, Minnesota taxpayers must add back 80% of the claimed bonus depreciation and then take a subtraction of 20% over the next five years.
Example: George took bonus depreciation of $50,000 in 2013. For Minnesota, he must add back 80% or $40,000 ($50,000 x .8 = $40,000) on his Minnesota return. He will take a subtraction of $8,000 each year ($40,000 x .2) over the next five years.
Note: This information piece is offered as educational information only and is not intended to be tax, legal or financial advice. For questions specific to your farm business or individual situation, consult with your tax preparer.
- Agricultural Tax Issues. Fall 2012. Harris, P.E. University of Wisconsin.
- The Tax Book – 2012 What's New In-Depth Edition.
- National Income Tax Workbook Update. 2012. Land Grant University Tax Education Foundation, Inc. College Station, TX
- Quickfinder Handbook – 2008 through 2011 – 1040 and Small Business Editions Thomson Reuters. Fort Worth, TX
- Farmers Tax Guide. 2012. Internal Revenue Service. (1.5 MB PDF)
1 Harris, P. E., Agricultural Tax Issues, Fall 2012. p. 5
2 The TAXBOOK: What's New In-Depth. 2012 Edition. Tax Materials, Inc. p. 3-6
3 Harris, P. E., 2012 National Income Tax Workbook Update. Land Grant University Tax Education Foundation, Inc. p. 9
4 2010 Quickfinder, 1040 Edition. p. 10-10
5 The TAXBOOK: What's New In-Depth. 2012 Edition. Tax Materials, Inc. p. 3-6
6 Farmer's Tax Guide. (1.5 MB PDF)