Purchasing farm equipment is often a significant financial burden. The worst part? Equipment like tractors and combiners loses value once they leave the lot. But what if there were a way to turn this financial burden into a powerful tax advantage? Well, there is.
Section 179 and bonus depreciation are tax provisions that allow farmers to make accelerated deductions on expenses incurred on farm equipment for tax purposes.
When you properly understand these legal provisions, farm equipment depreciation becomes more than an accounting concept. It becomes a strategic tool that you can leverage to reduce your tax liability and improve cash flow.
In this comprehensive guide, we’ll break down:
- The fundamentals of farm equipment depreciation
- How Section 179 allows immediate expensing of qualifying purchases
- Bonus depreciation and how you can use it to maximize deductions
- When to use each method or combine both
- Real-world applications and planning tips
So, stick around till the end. But before we dive into ways you can keep more money in your pocket through deductions, let’s go back to the basics.
Understanding farm equipment depreciation basics
Farm equipment depreciation is the process of deducting the cost of qualifying farm equipment from gross income over the course of the equipment’s useful life. Qualifying equipment includes hardware and software used for business purposes.
The Internal Revenue Service (IRS) determines an equipment’s useful life. You can find a list of qualifying equipment and its useful lives in Publication 946.
Why farm equipment depreciation matters for tax planning
It is important to consider farm equipment depreciation during tax planning because it directly impacts taxable income, cash flow, and long-term financial strategy.
Taking big deductions in high-income years drastically reduces your tax liability. With more money in your bank account, you can invest in other critical areas of your farm business.
Deductions for farm equipment can also impact other deductions, such as the Qualified Business Income (QBI) deduction. The QBI deduction allows farmers to deduct up to 20% from their net income.
Equipment depreciation coordinates with other tax strategies such as farm income averaging, conservation expenses, and deferral of crop sales—great tax planning considers all these to maximize overall savings.
Traditional vs accelerated depreciation methods
The Modified Accelerated Cost Recovery System (MACRS) is the traditional method for deducting equipment purchase costs.
There are two types of MACRS: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Each has its advantages.
MACRS uses varying percentages of deductions during the equipment’s recovery period. The recovery period refers to the number of years you’re allowed to make deductions for the purchase cost of the equipment. MACRS is extensively discussed in chapter four of IRS Publication 946.
Accelerated depreciation methods include Section 179 and bonus depreciation. Both allow farmers to expense a huge chunk or the entire amount spent on farm equipment in the first year.
Types of farm equipment that qualify for depreciation
Farm equipment that qualifies for depreciation can differ depending on the type of deduction you choose. However, they generally include:
Machinery and equipment
- Tractors
- Combines
- Seeders and planters
- Irrigation systems
Farm vehicles:
- Pickups
- ATVs and UTVs
- Cars or light SUVs
Structures and improvements
- Silos and grain bins
- Single-purpose buildings
- Fire protection and alarm systems
- Security systems
Tools and Miscellaneous Equipment
- Portable generators
- Fuel storage tanks
- Livestock handling equipment
Deep Dive Into Section 179 Deduction
Section 179 of the US Internal Revenue Code is a tax deduction provision. It allows farmers to recover all or part of the cost of qualifying property. You can claim this deduction in the year you place the property in service.
To qualify for Section 179, the property must be used more than 50% for business throughout the years set as its recovery period by the IRS in Publication 946. New and used equipment qualify. Section 179 expires at the end of 2025.
For tax years beginning in 2025, the maximum Section 179 deduction expense is $1,250,000. The deductible amount begins to phase out dollar for dollar if the total qualifying property placed in service during the tax year exceeds $3,130,000. The deduction is fully phased out once purchases exceed $4,380,000.
Aside from expense thresholds, there’s also an income limitation on Section 179 deductions. You cannot deduct more than the taxable income you make from the conduct of any trade or business during the year.
For example, John makes $90,000 from crop sales. Farm-related expenses come out to $70,000. John’s net or taxable income is $20,000 ($90,000 – $70,000). If John bought a $50,000 tractor, he can only deduct $20,000.
The remaining $30,000 balance is carried over to the next tax year, and he can claim the full amount if he has enough taxable income to cover it.
Qualifying property
According to the IRS, qualifying property under Section 179 includes:
- Tangible personal property such as farm machinery and equipment, gasoline storage tanks, and livestock.
- Property that is an integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services.
- Single-purpose agricultural (livestock) or horticultural structures, such as pig pens or poultry houses.
- Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
- Off-the-shelf computer software that is readily available for purchase by the public and has not been substantially modified.
- Improvements made to an interior portion of a nonresidential building after the date such building was first placed in service.
Benefits and disadvantages
Section 179 deduction has advantages, such as:
- Immediate tax relief: Significantly reduces your taxable income in the first year.
- Simplified record-keeping: No need for tracking depreciation schedules or complex calculations.
- Flexibility: Can be combined with bonus depreciation to maximize tax savings.
But it’s not without limitations:
- Income limitations: The total cost you can deduct each year after applying the dollar limit is limited to the taxable income you made from farming during the year.
- Phase out thresholds: If you purchase equipment exceeding $3,130,000, your deductible amount takes a hit and becomes non-existent when you go over $4,380,000.
- Recapture risk: If you sell, stop using, or convert equipment to personal use before the end of its recovery period, you’ll have to pay back part or all of the deduction you claimed.
Bonus depreciation explained
Bonus or special depreciation is a tax incentive that allows farmers to immediately deduct a large percentage of the cost of qualifying property in the first year. It is applied automatically unless you opt out.
The Tax Cuts and Jobs Act of 2017 increased the bonus depreciation deduction from 50% to 100%. Since 2022, the rate has steadily dropped by 20% each year. The rate for 2025 is 40% and it’s expected to phase out in 2027 unless Congress extends it.
Bonus depreciation timeline
| Year asset was placed in service | Bonus depreciation |
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
Like Section 179, it applies to new and used equipment. However, unlike Section 179, there are no dollar and income limitations.
You can deduct up to 40% of the cost of qualifying farm equipment if it is placed in service in 2025. The leftover amount is depreciated using MACRS.
Bonus depreciation can be applied after Section 179 and before other depreciation deductions, such as MACRS. You can elect to skip Section 179 and use only bonus depreciation.
Qualifying property requirements
The rules and limitations for depreciation and expensing state that property is eligible for bonus depreciation if:
- The taxpayer didn’t use the property at any time before acquiring it
- The taxpayer didn’t acquire the property from a related party
- The taxpayer didn’t buy the property from a related company or business group
- The taxpayer didn’t obtain the property in a way that carries over someone else’s tax value
- The taxpayer didn’t inherit the property from a deceased person
- The taxpayer didn’t acquire the property through an exchange or an insurance claim payout
Some types of property are not eligible. One such exclusion is for property primarily used in the trade of furnishing or the sale of:
- Electrical energy, water, or sewage disposal services
- Gas or steam through a local distribution system
- Transportation of gas or steam by pipeline
Exclusions also extend to any property used in a trade or business that has had floor-plan financing indebtedness if the floor-plan financing interest doesn’t meet specific requirements.
Bonus depreciation can’t also be claimed on improvements to property acquired and placed in service after December 31, 2017.
Assets or property that qualify for bonus depreciation are tangible property depreciated under MACRS with a recovery period of 20 years or less. Certain computer software, water utility property, theatre productions, and even plants also qualify.
Properties that can be depreciated using bonus depreciation include:
- Tractor units
- Water utility property
- Livestock, including race horses
- Office furniture and fixtures
- Office equipment like computers and copiers
- Automobiles, taxis, buses, and helicopters
- Farming machinery placed in service after 2017
- Tree or vine bearing fruits and nuts
Benefits and considerations for bonus depreciation
Bonus depreciation has significant benefits, such as:
- Immediate tax relief: Deducting a large percentage of an asset’s cost in the first year reduces taxable income.
- No dollar limits: Unlike Section 179, there is no limit to the amount of money you can deduct.
- Can be stacked: You can apply it after using Section 179 and depreciate whatever’s left with MACRS.
If you decide to use bonus depreciation, you may encounter drawbacks like:
- Fixed deduction: Each year’s bonus depreciation percentage is fixed; you cannot choose how much you want to deduct.
- Risk of recapture: If you stop using the property for business or sell it before the end of its recovery period, you’ll have to add back some of the deduction to your taxable income.
- Dropping rates: Bonus depreciation rates are constantly falling, and you’ll be able to deduct less money each year.
Strategic comparison: When to use each method
| Section 179 | Bonus depreciation |
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You should use Section 179 when:
- You make a lot of taxable income
- You want control over how much to deduct
- Your purchases are below the maximum deduction and phase-out threshold
Bonus depreciation is better if:
- You had a highly profitable year
- You don’t want to track elective deductions
- Your purchases exceed the maximum deduction and phase-out threshold for Section 179
You can combine Section 179 and bonus depreciation in situations where:
- You want to deduct as much money as possible in the first year
- You want control, and still want to deduct a large amount of equipment costs
- Your purchase costs exceed the maximum deductible under Section 179, but are under the $3,130,000 limit
Impact on cash flow and tax planning
Both Section 179 and bonus depreciation often have a positive impact on cash flow. The extra money you save from deductions can be reinvested into other things.
Section 179 is especially useful for tax planning. You can deduct specific amounts, just enough to avoid higher tax brackets.
The flexibility that Section 179 offers also means that you can spread most of your deductions into future years. This is ideal if you expect a higher income in the future.
Bonus depreciation is more aggressive and fixed, so you cannot control how much to depreciate using MACRS. Therefore, there’s limited deduction left for the rest of the asset’s recovery period.
Real-world applications and planning tips
Example 1
Farmer Sam
Sam’s net income: $200,000
New combine harvester cost: $500,000
Sam is eligible for Section 179 and bonus depreciation of the new combine harvester. He’s under Section 179 dollar limits; however, his net income limits how much he can deduct.
Sam deducts the full $200,000 he’s eligible for under Section 179 and is left with a balance of $300,000 ($500,000 -$200,000). He can carry forward the balance or apply a bonus depreciation.
If he decides to apply bonus depreciation:
Using the 2025 percentage rate, Sam will be able to deduct an additional: 40% x $300,000 = $120,000
This brings the total figure to:
$200,000 + $120,000 = $320,000.
$500,000 – $320,000 = $180,000
The balance of $180,000 will be depreciated using the traditional MACRS method, giving Sam an extra deduction.
Note that claiming deductions above your taxable income creates a Net Operating Loss (NOL). For more information on NOL, please see IRS Publication 536.
Example 2
Farmer Steve
Steve’s net income: $2,500,000
New large John Deere tractor: 1,260,000
In this scenario the cost of Steve’s tractor is above the maximum Section 179 deduction of $1,250,000. But his taxable income is high, and he’s still under the $3,130,000 limit.
If he made purchases of let’s say $3,800,000, he would be $670,000 over the limit ($3,800,000 – $3,130,000). When you apply the dollar-for-dollar phase-out, his maximum deductible under Section 179 would be:
$1,250,000 – $670,000= $580,000
He can apply the remaining deduction to one asset or spread it across qualifying assets.
But since his purchase is under the limit, Steve can deduct the full $1,250,000 under Section 179. Like Farmer Sam, he can carry over the balance of $10,000 ($1,260,000 – $1,250,000) or apply a bonus depreciation.
If he chooses to apply a bonus depreciation:
Using the 2025 percentage rate, Steve can deduct an additional: 40% x $10,000 = $4,000.
This brings the total figure to:
$1,250,000 + $4,000 = $1,254,000.
$1,260,000 – $1,254,000 = $6,000
The balance of $6,000 will be depreciated using the traditional MACRS method, giving Steve an extra deduction.
Planning tips
To optimize your tax savings, it’s essential to time purchases strategically. Assets must be ready and available for use by December 31, not just ordered or paid for.
Avoid buying property in the last quarter. If over 40% of all assets are placed in service in the last three months of the year, MACRS switches to the mid-quarter convention (smaller first-year deductions).
You must also meticulously keep track of the business use percentages of assets on which you claim a deduction. Failure to do this may trigger a recapture.
Tax laws are constantly changing, and it can be difficult to keep up. This is why working with a tax professional is recommended to ensure you’re saving as much money as possible while staying compliant.
With Section 179 ending on December 31, 2025, and bonus depreciation set to phase out next year, you should act fast to utilize them before they’re gone. 2025 to 2026 may be your last opportunity.
