Farmers hanging onto worn-out equipment because
11/23/2005

Farmers hanging onto worn-out equipment because of the tax code’s outdated depreciation system soon could have a new incentive to purchase the latest tractor, combine and other agricultural machinery.

AgriNews
http://www.agrinewspubs.com/Main.asp?SectionID=1&SubSectionID=207&ArticleID=9385

Rep. Chris Chocola, R-Ind., recently was joined by nine members of the tax-writing U.S. House of Representatives Ways and Means Committee to introduce bipartisan legislation to modernize the tax code so farm equipment can be depreciated over five years instead of seven. "Before coming to Congress, I worked in the agriculture community," Chocola said. "I know firsthand that farmers depend on the benefit of depreciation to help pay for new, more efficient equipment. My bill will simply update the Tax Code making it more consistent with the realities of modern-day farming."

Currently, if a farmer purchases a $300,000 combine, its loss in value over time is considered a business expense. They can deduct the cost of the combine over a seven-year period. This is a system known as depreciation. However, the rules governing tax depreciation schedules remain largely unchanged since the 1980s when Congress passed the Tax Reform Act of 1986.

Due to the intense usage of farm equipment, its life span and utility can be closer to five years. In fact, the U.S. Department of Agriculture’s Farm Service Agency surveys show, on average, farmers and ranchers finance equipment and machinery for five years.

The ideal number of years allowed to depreciate a piece of machinery should match the period of debt service so that the tax benefits can be used to finance payments. "This bill is a bipartisan effort to fix a mismatched system," Chocola explained. "By shortening the depreciation period, we’re encouraging farmers to make the investments they need to boost their productivity and increase farm income.” According to the American Farm Bureau Federation, a change in depreciable life of farm equipment from seven to five years would align depreciation and debt service and increase farm income by $800 million in a typical year.

This would not only help farmers and ranchers to cover their debt service, but would help them to replace worn-out machinery. Don Villwock, president of the Indiana Farm Bureau, indicated his organization would strongly support Chocola’s legislation. "Farming is a machinery-intensive industry and the potential to reduce the overall costs of equipment by accelerating the depreciation schedule would provide much needed relief to our members at a time when they’re being hit hard by increased costs for fertilizer and fuel," he said.

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