Benefits For Horse Industry in Tax Bills

Several tax bills were passed in the last Congress that extended tax benefits for the horse industry for additional years.  The American Recovery and Reinvestment Act of 2009, better known as the stimulus act, the Hiring Incentives to Restore Employment Act, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed during the lame-duck session, all included important tax benefits.

Some of these provisions have been extended; others have not allowing them to revert to prior levels, which are still favorable.

Individual Tax Rates

The legislation passed in December, 2010 set individual income tax rates at current levels through 2012.  The marginal rates stayed at 10% to 35% depending on one’s income bracket and are indexed for inflation.  Had these rates not been extended, tax rates would have risen about 4% for each bracket.  

The tax rate on capital gains remains at 15% through 2012, rather than rising to 20%.

The tax rate on dividends remains at 15% through 2012, rather than being taxed at the same rate as a taxpayer’s ordinary income, which could be as high as 35%.

Payroll taxes for all workers and the self-employed were reduced 2% from 6.2% to 4.2%, and 12.4% to 10.4%, respectively, for 2011 on wages up to $106,800. 

In December, 2011, Congress passed an extension of the payroll tax reductions, maintaining the 2% reduction in payroll taxes for workers and the self-employed for two months through February, 2012.  Negotiations are underway between the House and Senate to find a way to extend payroll tax relief through 2012.

The bill passed by Congress in December did not extend the Section 179 expense deduction or 100% bonus depreciation at 2011 levels.  Both provisions have returned to prior levels.

Expensing Allowance Drops

Anyone who purchased a horse or other property for his horse business and placed it in service in 2010 and 2011 could deduct up to $500,000 of the cost in that year.  This applies to horses, farm equipment and other depreciable property used in a business.  If purchases exceeded $2 million, the deduction decreased one dollar for each dollar over $2 million.

Because the expensing provision was not extended in December at the 2011 level, it has returned to $125,000 for 2012 and phases out dollar-for-dollar once purchases of depreciable property reach $500,000.  As before, the 179 expense deduction applies to horses, farm equipment and other depreciable property used in a business and permits a horse owner or breeder to write-off in the first year up to $125,000 in assets purchased and placed in service in one's horse business in 2012.

Bonus Depreciation Reverts to 50%

Bonus depreciation doubled from 50% to 100% for eligible assets for 2011, allowing horse owners and other horse businesses to write off the entire cost of “new” capital assets when purchased and placed in service.  To be eligible for bonus depreciation the original use of the property must commence with the taxpayer.  Any prior use makes the property ineligible.  This 100% bonus depreciation was retroactive and benefitted any business involved in the horse industry that purchased and placed eligible depreciable property in service after September 8, 2010 and through 2011. 

Because it was not extended in December, 2011, bonus depreciation has returned to 50% for 2012, allowing horse owners and other horse businesses to write off immediately 50% of the cost of "new" capital assets, including horses, purchased and placed in service in 2012.  To be eligible for bonus depreciation the original use of the property must still commence with the taxpayer.  Any prior use makes the property ineligible.

Retroactive Change is Possible.  It is possible that the higher levels for expensing and bonus depreciation could be reinstated retroactively to January 1, 2012.  In fact, the House-passed payroll-tax bill extended 100% bonus depreciation through 2012, but the Senate bill did not.  The ongoing January-February negotiations on the one-year extension of the payroll tax reduction could include other changes to the tax code, such as the expense deduction or bonus depreciation.  But this is speculation at this point.

Estate Tax Rate and Exemption

Effective January 1, 2011, the top estate tax rate was 35% with an exemption of $5 million for individuals and $10 million for married couples through 2012.  This means that only estates valued at over $5 million ($10 million for married couples) are subject to the tax.

Contribution of Property for Conservation Purposes 

Owners of horse farms and ranches are interested in the tax benefits available to those who contribute property for conservation purposes.  Conservation easements are one way that owners can keep their property available for farming, rather than selling it for commercial purposes, while getting a tax benefit.  Under legislation passed a number of years ago, a landowner with 50% of more of his/her income from agriculture could get a deduction for the contribution of a conservation easement up to his/her full income, with any unused amount carried forward for 15 years.  This provision had expired and the deduction was limited to 30% of income.  The bill passed in December, 2011 reinstated the conservation easement through 2012.