According to Thomas A. (Tad) Davis,this year may be the best ever for write-offs of horses, but you need to act soon. Thanks to the Tax Relief Act passed last December, taxpayers have access to a benefit called 100 percent bonus depreciation. This benefit allows buyers to write off the entire purchase price of qualified property in 2011.
An example of qualified property is a yearling that is purchased and put into training this year. Other examples include new farm equipment, fences and barns.
Bonus depreciation is scheduled to drop to 50 percent next year.the end of last year, the President signed into law the high profile tax bill that extended the current income tax rates and many other tax benefits that were expiring at the end of 2010.
Two of the most important benefits for horse owners are the continuation of generous bonus depreciation and a higher expense allowance in 2011. The write-offs for horses in 2011 are better than they have ever been.
Bonus depreciation was increased to 100% for eligible horses or farm equipment placed in service in 2011. In other words, the entire cost of eligible horses or farm equipment purchased and placed in service in 2011 can be entirely written off that year. The rate goes down to 50% for eligible horses and other property placed in service during 2012.
As has been true in the past, to be eligible for bonus depreciation the original use of the eligible property must commence with the purchaser. Any prior use, personal or business, disqualifies the property. This, in effect, limits bonus depreciation to the purchase of young horses that have not been raced or previously used in any way, including personal use.
There is no limit on the number of properties that can be written off using bonus depreciation, the amount of the write-off on any one property, or the aggregate total of the write-off as long as each horse or other property qualifies.
To illustrate bonus depreciation, assume an individual in the horse business purchases a yearling at a sale for $1 million in 2011 and places the yearling in service that year. The purchaser can write off (depreciate) the entire $1 million on his or her 2011 tax return. If the individual also bought a new tractor in 2011 for $50,000 and placed it in service in 2011, he or she could also write off the entire purchase price of the tractor.
The expense allowance currently in effect allows the purchaser to write off up to $500,000 of the cost of horses or farm equipment purchased and placed in service in 2011 if the total of all purchases of depreciable property during the year do not exceed $2 million. If purchases exceed $2 million, the expense allowance goes down one dollar for every dollar that purchases exceed $2 million.