OMAHA (DTN)--Signed by President George W. Bush May 28, the Jobs and Growth Tax Relief Reconciliation Act of 2003 targets reduced taxes and increased spending as remedies for a sluggish economy. Included are tax incentives that can be used when buying farm machinery.
Before partaking of the remedies, the agricultural industry needs to have a plan, said Neil Harl, a professor of economics in the College of Agriculture at Iowa State University and Guido van der Hoeven, an extension specialist in the Department of Agricultural and Resource Economics at North Carolina State University.
If people simply buy equipment or other property in order to get tax credit and don't think about how they will eventually pay for the purchase, they could run into problems, van der Hoeven said.
"Folks can basically wipe out any farm profit from an expensing standpoint," he said. "If it's not a good business decision before taxes, then it won't be a good decision after taxes."
Tax changes include increased depreciation deduction allowances and Internal Revenue Code section 179 expensing. Both increases allow businesses to recoup the cost of equipment more rapidly than they could under old laws.
"We now have bigger tools to manage tax liabilities on the purchase of capital goods," van der Hoeven said.
First-year depreciation deduction allowances increased from 30% to 50% for new property purchased between May 5, 2003, and Jan. 1, 2005.
To qualify for the bonus deduction, property must be new, have a life of 20 years or less, be placed into service before Jan. 1, 2005, and be purchased after May 6, 2003, with no binding contracts on it before that date. Taxpayers may opt out of the bonus deduction; if they don't, the 50 percent deduction applies.
Section 179 changes are for small businesses, those purchasing $400,000 or less in capital depreciable goods during a fiscal year. Expensing is phased out for those who spend amounts greater than $400,000. Both new and used property can qualify for section 179 expensing.
In 2003, the largest amount that could be expensed under section 179 was $25,000. Under the 2003 act, the amount increases to $100,000 for 2003, 2004 and 2005. "That was passed to induce investment in capital goods, to spur the economy," Harl said. But "there are unintended consequences when you make changes of that magnitude," he said. "One of my concerns is that they may encourage... investments that may not be prudent in the long term."
Increased section 179 expensing and the bonus deductions could give farmers an incentive to purchase equipment, possibly having a positive effect on producers, but it could also drive up overhead costs.
In the 1980s, investment tax credit caused debt problems, van der Hoeven said. "This (the 2003 act) can kind of do the same thing," he said. "It encourages purchase of new equipment."
"This is eerily reminiscent of the tax cuts in 1981," Harl said. "It took us more than a decade to work around that hole.
"People respond to economic incentives. They did then and they will now," he said. "People need to keep in mind that they should only respond to these incentives if it makes long-term economic sense."