Immediate expensing, a major announcement in last federal budget, could provide great planning opportunities for your farm.
What does it mean?
For certain capital asset purchases after April 19, 2021, you can write off 100 percent of the purchase rather than claim the percentage as allowed for with tax depreciation. You can now tell your spouse that buying a tractor is just as good as buying a cow for tax planning purposes.
This is available for certain capital assets that become available for use before Jan. 1, 2024. You can make the claim for 100 percent of the purchase up to $1.5 million per tax year. Equipment this will apply to includes tractors, combines, trucks, pull-type implements, computers and GPS. This does not apply to longer term assets, such as buildings, bins, water rights and quota.
It applies only to equipment that is new to you if it is not purchased from a non-arm’s-length party (such as a parent or sibling). However, it does not need to be brand new equipment from the dealership.
The timeline of changes
Before Nov. 21, 2018, there was a half-year rule for tax depreciation that could be claimed. For example, if you purchased a tractor for $100,000 you could only claim $15,000 of expense in the year of purchase.
From Nov. 21, 2018, to April 19, 2021, there was an accelerated claim available, which effectively made it so you could claim 1.5 times the normal depreciation rate. For the same tractor above, you could now claim $45,000 in the year of purchase.
Now, for any purchases after April 19, 2021, you can potentially claim 100 percent of the purchase. So that same tractor that only resulted in an expense of $15,000 three years ago can now be fully expensed for tax purposes.
How beneficial is this?
This obviously gives your farm another tax-planning tool. If you were planning on buying new equipment, you can do so and potentially avoid playing the deferral game. On a year-by-year tax planning perspective, it gives a lot of flexibility.
However, in the long run you do not get any extra claims. Under the old rules, because you claimed a smaller amount in the first year, you got to continue claiming 30 percent of the remaining balance going forward.
With the 100 percent writeoff in the first year, there are no further claims to make after that for a new piece of equipment.
You may consider having your tax adviser use the optional inventory adjustment with this depreciation claim for the ultimate flexibility.
It is important you speak with your tax adviser to analyze the advantages and disadvantages of this increased claim on your operation and planning.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: email@example.com. He would like to thank Riley Honess of KPMG for his assistance with writing this article.