How to Benefit From Tax Code Provisions

In the Harvest Edition of the magazine (Vol. 52), we looked at some business strategies to help minimize the risk and mitigate the uncertainties that exist in a volatile market. This month we’re taking a look at a related topic with a much more positive focus: How to maximize the benefits available to producers through a recent modification to the tax code. This one should evoke a smile to offset the frown that resulted from that issue’s offering. And, unlike the economy, the war, and the weather, this is something we have some control of.

Each year, when the harvest is at or near its end, many producers start taking a closer look at their machinery needs for the upcoming season. Has the combine got one more harvest left in it? Is the planter demanding more repairs every year? Would a newer tractor improve efficiency and make better use of labor?

For many farm operations, the final months of the year are also an important time for tax planning. Equipment purchases can have a significant impact on taxable income, and understanding the available tax provisions may help producers make more informed decisions.

It is important to note that seeking a tax shelter should never be the only reason to buy equipment. But when it’s at a point where a purchase is necessary or makes good business sense, planning that purchase around the current tax provisions can and should be a significant factor to consider. The right investment, made at the right time, may help lower a farm’s tax bill and at the same time position the operation for greater efficiency and profitability in the year ahead. The key is to approach equipment purchases as a business decision first and a tax strategy second.

What Are the Farm’s Needs?

A tax deduction alone rarely justifies purchasing equipment that isn’t needed. Most producers have heard the old saying, “Don’t spend a dollar to save 30 cents in taxes.”

So, before considering the tax consequences, first of all, evaluate whether the machinery will provide a significant improvement in productivity, reliability, and labor efficiency. Will it cut down on fuel consumption, repairs, and other operating costs? If the answer is yes and the operation has had a good year, then tax planning may help determine whether now is the right time to move forward with those purchases. Producers who understand both the costs and the tax implications of a purchase are in a stronger position to make sound business decisions.

Understanding Section 179

For many years, Section 179 of the tax code has been the farmer’s best friend. And it remains one of the most valuable tax tools available to equipment buyers. It allows producers to deduct the cost of qualifying equipment in the year it is placed into service rather than depreciating it across multiple years.

For the 2026 tax year, the Section 179 deduction limit is $2.56 million, with a phase-out beginning when total qualifying purchases exceed $4.09 million. For many family farms, those limits are high enough that most planned machinery purchases can potentially qualify for immediate expensing. Even large farms can benefit from this provision as it can make a big dent in the operation’s tax bill.

Here are some common examples of qualifying purchases:

• Tractors and combines
• Planters, sprayers, and tillage equipment
• Grain handling systems
• Livestock equipment
• Utility vehicles and certain farm-use vehicles
• Irrigation and farm infrastructure improvements that meet IRS requirements

One of the big reasons why producers appreciate Section 179 is its flexibility. The deduction is elective, allowing operators and their tax advisers to determine how much of an asset’s cost to expense in a given year. That flexibility can be especially useful when balancing income across multiple years or managing tax brackets.

Bonus Depreciation Is Back in the Conversation

For years, Section 179 has been the go-to strategy for deducting equipment purchases. While that is still the case in many situations, it’s time to give bonus depreciation another look. Why? Because recent federal tax changes have restored 100% bonus depreciation for many qualifying assets acquired after January 19, 2025. Simply put, eligible equipment can now be fully deducted in the year it is placed into service rather than depreciated through several years.

At first blush, you may be thinking that bonus depreciation and Section 179 are pretty much the same thing. After all, both may allow a producer to write off a large equipment purchase in the current tax year. True enough. But there are some important differences, and they become more apparent when dealing with larger purchases, lower-income years, or long-term tax planning.

One major distinction is that Section 179 is elective and subject to annual limits. In addition, the deduction generally cannot exceed taxable business income. Bonus depreciation works differently. It is not limited by taxable income and can potentially create or increase a business loss that may be used under other tax rules. It also is not subject to the same dollar limitations that apply to Section 179.

Illustrating the Difference

Farmer A is a grain producer. He purchases a used tractor for $180,000 near the end of the year. The farm has generated strong profits this year and expects a sizable tax bill. In this situation, Section 179 may be an excellent fit because the producer can elect to expense the entire purchase and immediately reduce taxable income.

Farmer B is in a slightly different situation. He runs a livestock operation and purchases $400,000 worth of equipment following a difficult year marked by drought, lower calf prices, and disappointing yields. Because taxable income is limited, the operation may not be able to fully benefit from Section 179 alone. But bonus depreciation could provide additional flexibility because it is not constrained by the same business-income limitations.

Now, consider Farmer C’s position. He is also a grain producer, and he purchases a new combine for $650,000 and several supporting pieces of equipment before year-end. Depending on income levels and overall tax strategy, the producer may choose to apply Section 179 to a portion of the purchases and use bonus depreciation on the remainder. That approach can maximize deductions while still preserving flexibility for future years.

So, the two provisions are not an either-or decision. Producers often use Section 179 first and then apply bonus depreciation to the remaining basis of the equipment. The best choice depends on profitability, financing arrangements, ownership structure, future income expectations, and state tax rules. That is why many farm accountants encourage producers to think beyond the current year’s tax return. A large deduction today may have the farmer pumping his fist and feeling really good about himself. On the other hand, spreading deductions across multiple years is less exciting but ultimately produces a stronger overall tax position.

Remember: the goal is not simply to eliminate taxes for one year. The goal is to manage income, cash flow, and equipment investments in a way that strengthens the operation during the long haul.

Think Beyond 2026

One of the most common mistakes in year-end planning is focusing exclusively on the current tax year. But as we know, agriculture is cyclical. It always has been. And as we discussed previously, it can at times also be highly volatile. Commodity prices rise and fall. The weather is more unpredictable than ever before. Input costs fluctuate. And the geopolitical climate and shipping delays can have a strong influence on overall profitability. Therefore, income can vary dramatically from one year to the next. As a result, tax planning often works best when producers look two or three years ahead rather than concentrating solely on December 31.

As part of the long-term tax strategy, there are some questions that should be asked and answered when considering making a large purchase.

• Will next year’s income likely be higher or lower than this year?
• Is this purchase being made for the purpose of replacing worn-out equipment or for expanding capacity?
• What impact will financing costs have on cash flow?
• How will this purchase affect future borrowing needs?
• Could making repairs to existing equipment help them to be productive for another season?

Retired agricultural economist Barry Barnett has frequently emphasized that successful risk management is less about predicting the future and more about preparing for uncertainty — a point we stressed in the Harvest edition. The same concept applies to tax planning. Flexibility and keeping one’s options open have great value.

Timing Also Matters

One detail that occasionally surprises producers is that simply ordering equipment is usually not enough to qualify it for a deduction. In most situations, machinery must be placed in service before year-end to qualify for current-year depreciation benefits. If a machine is ordered in December but isn’t delivered or ready for use until January or February, the deduction will likely also be delayed.

So, communication is important. Producers considering a purchase should talk with dealers, lenders, and tax advisers well before the final weeks of the year. 

The Best Strategy

It’s often the simplest one: Keep the cart behind the horse. Buy equipment because it makes good business sense. Then use the tax code as a tool to make that investment work as efficiently as possible. That kind of tax planning helps the farmer keep an optimistic outlook while managing uncertainty in today’s volatile market. It also pays dividends long after the paperwork is filed.

Author’s Note: As we have seen, tax laws change periodically. In addition, individual circumstances also change and vary widely from each other. Therefore, producers should always consult a qualified tax professional before making equipment purchases or implementing tax-planning strategies.