With this little-known provision, now may be the best time to buy new equipment or farm property.

According to accountants who handle tax forms for farmers across America, the next three years may be the best time to purchase a new tractor, combine, livestock barn, machine shed or even a new computer system.

That's because a new first-year depreciation bonus, buried in the economic recovery package passed by Congress following the 9/11 terrorist attacks in New York and Washington, D.C., permits a bigger first-year write-off. In some instances, it can be nearly 50 percent of your purchase price.

The legislation, passed in March 2002, allows farm businesses to take an additional 30 percent of the depreciation balance as an expense on their farm tax forms during the year of purchase. The law is backdated to 2001.

"The change certainly tips the scales in favor of major new purchases," noted Steve Clausen, a tax accountant with Dietz, Donald and Company at Elkader, Iowa.

Clausen, who files federal tax forms for more than 180 farm operations--from dairy and hogs to corn and soybeans--is informing farm clients about the opportunity to take advantage of the 30 percent bonus.

"We have filed extensions for some clients so we could go back and look at their new purchases," he said. "There have been several instances where the bonus deduction saved the farmer money, particularly in the dairy segment since dairy income was higher in 2001 than in 2000.

"Now we're going back through all our customer tax forms to look at them on a case-by-case basis, because we can file an amended return if it would save them money."

According to Dr. Neil E. Harl*, professor of economics at Iowa State University, the new 30 percent depreciation bonus applies to property purchased and placed in service after Sept. 10, 2001. He adds that the bonus will remain in effect for property acquired before Sept. 11, 2004. "The property then has to be placed in service before Jan. 1, 2005," he noted.

This provision allows depreciable property, such as farm equipment, to be ordered and purchased by the deadline date. Then it can be delivered and placed in service by the end of 2004.

According to Harl, the 30 percent bonus depreciation rule applies to all new property purchased for the farm operation with a depreciation life of 20 years or less. It includes machine sheds, livestock buildings, tile lines, farm equipment, computer software, water utility property and qualified leasehold property.

What about leasing?

Be careful here, Harl advised. There are very specific rules under the leasing provision. With leases, you really muddy the water on depreciation. So you need to look at each lease separately to figure out whether it's a purchase or true lease.

"If it's a true lease, there's no depreciation deduction claimable," Harl explained. "If it's a purchase arranged as a lease, that's a different story. The best advice to qualify for that 30 percent depreciation bonus is to talk to your tax person first."

For tax forms filed after June 1, 2002, farmers also have to elect whether to take the bonus provision or not. It's presumed that you took the 30 percent unless you elect not to do so. That's important, Harl noted. He advises farmers to have their accountants carefully figure net profit and purchases so they can file the way that makes the most sense.

The new bonus rule can create a substantial tax savings on major purchases, said Clausen. He explained the math using this example.

"Say you purchase a new farm machine for $100,000. Under the old rule, the maximum first-year allowable deduction for depreciation would be $24,000. To add the 30 percent bonus, you take the depreciation balance remaining ($100,000 - $24,000 = $76,000) and multiply it by 30 percent."

So bonus depreciation = $76,000 x .30 = $22,800.

New total first-year depreciation = $24,000 + $22,800 = $46,800.

Clausen normally figures depreciation for farmers at 1.5 times the declining balance to get more up-front deductions. But he also recommends the straight-line method when it's more advantageous.

Both Clausen and Harl pointed out that farmers need to be careful in applying the new rule to purchases.

"You don't want to waste the depreciation," said Clausen. "That's always a big concern when we're doing taxes and consulting with farmers. You may need it down the road, so if you take too much of a loss on your farm operating income, you could be throwing away personal exemptions and deductions.

"For example, a farm family with three or four children could have a $15,000 deduction tossed out the window," he said. "Sometimes you don't want to take too much depreciation because other deductions may help save on taxes."

Harl also advised farmers to look ahead when applying the new rule.

"It's a matter of taking a long view," he explained. "Do you want to run up a loss and reduce your income enough so you are in negative territory, then lose your allowable deductions and exemptions? What you don't want to do is claim something for which you're not going to get any benefit.

"Be sure when you claim 30 percent that you get an economic benefit. If you have income of $100,000 pretax or more, that's a pretty good indication that you can use it. But if you have $5,000 income pretax, and you're going to claim $3,000 for this kind of depreciation, it may not make sense."

Clausen believes the new rule provides real benefits in purchasing new farm equipment and in constructing new buildings, if farm income is there to support it.

"I think the real advantage will be on machine sheds," he said. "In the past, many of my clients came in here and said, 'Well, I spent $30,000 on a new machine shed,' and I would tell them, 'You're going to get a $1,500 deduction.' They get this look on their face like 'What do you mean?'

"On a machine shed you can't take very much, because you have to depreciate it over 20 years. So that 30 percent bonus will really help. All of a sudden you've made that a $9,000 deduction, and if you're in the 28 percent tax bracket, that's fairly sizable."

* Dr. Harl is the Charles F. Curtiss Distinguished Professor in Agriculture at Iowa State University and a member of the Iowa Bar.

Reprinted with permission of Massey Ferguson Corporation (www.masseyferguson.com).