Legislators look to change farm equipment depreciation rules

SALEM, Ohio – If a federal initiative goes through, American farmers will get some long overdue relief when it comes tax time – and when it comes time to spend on a new tractor or combine.
Congressmen Earl Pomeroy, a Democrat from North Dakota, and Wally Herger, a California Republican, teamed to introduce legislation May 11 that would reduce the depreciation period for agriculture machinery and equipment from seven to five years.
By shortening the time period farm equipment is depreciated on the tax rolls, farmers get taxed less, which means more help in buying new equipment to keep up with technology and replace tractors that are worn out.
Life span. “Farmers and ranchers … across the country deserve fair tax treatment,” Pomeroy said.
Pomeroy said the legislation makes an important investment in both American farmers and the U.S. economy by better matching farm equipment depreciation to actual wear and tear on machinery.
The old way. The rules that govern tax depreciation schedules for farm equipment remain largely unchanged since the 1980s when Congress passed the Tax Reform Act of 1986.
In that bill, Congress revised the tax treatment for equipment used for construction to enjoy a five-year depreciation schedule, but left agriculture equipment rules unchanged at seven years.
While construction and agriculture equipment are often interchangeable, tractors used in construction have a shorter, five-year depreciation schedule, yet backhoes used on farms remain on a seven-year depreciation schedule.
The double-standard doesn’t make sense, lawmakers said.
“This 1980s-era depreciation schedule is out of sync with current farm equipment trends,” said Dennis Slater, president of the Association of Equipment Manufacturers.
“The tax code should be changed to better reflect these realities and stop penalizing agricultural producers for making appropriate business decisions for their operations.”
By amending the Internal Revenue Code through the new legislation, legislators want to define five-year property as “any machinery or equipment other than any grain bin, cotton ginning asset, fence, or other land improvement which is used in a farming business.”
The bill would equalize the tax treatment of agriculture and construction equipment, analysts say.
Increased income. The American Farm Bureau Federation supports the bill because their economists estimate that shortening the depreciable life to five years would align depreciation and debt service.
In doing so, it would increase farm and ranch income by $800 million in a typical year.
“Farming and ranching is an equipment-heavy industry, approaching $100 billion of stock in use during any given year. Farm machinery makes up about 7 percent of the total assets owned by farmers and ranchers,” said American Farm Bureau Federation President Bob Stallman.
“The enhanced depreciation schedule will better allow us to direct the tax benefits of equipment depreciation toward the actual financing of equipment payments. This would not only help farmers and ranchers cover our debt service, but it also would help us purchase replacement machinery on a more timely basis.”
The U.S. agricultural equipment industry generates over $82 billion in economic activity and nearly 250,000 jobs.
Other support. Equipment dealer trade associations including the Associated Equipment Dealers, North American Equipment Dealers Association, Association of Equipment Manufactures and their equipment manufacture members like John Deere also support the bill.
Pomeroy’s legislative assistant Diane Oakley said the bill’s only downfall is that it’s proposing a tax change.
She said the biggest challenge will come in finding money to fund the tax cut. Legislators have not yet identified where that money may come from, Oakley said.
The bill is currently in the House Ways and Means committee.
(Reporter Andrea Zippay welcomes feedback by phone at 800-837-3419 or by e-mail at azippay@farmanddairy.com.)