The value of accelerated depreciation use by farmers: Evidence from Michigan

In 1981 the IRS tax code created Section 179 depreciation deductions. Section 179 was a form of accelerated depreciation, allowing farmers to deduct a larger amount of depreciation in the year an asset was placed in service. In 2002 "Bonus" depreciation was added as another form of accelerated depreciation available to farm tax filers. Both forms of accelerated depreciation allowed farmers to take large amounts of depreciation in the first year relative to the default tax depreciation known as the Modified Accelerated Cost Recovery System (MACRS). These accelerated depreciation deductions allowed farmers to decrease their taxable income, thus saving them money and incentivizing investment. The objectives of this thesis are to examine: which farms use accelerated depreciation, when and how much they use it; what is the after tax present value of accelerated depreciation deductions; and what is farmers realized decreased cost of capital from these tax policies and implications for investment. This research finds that the after tax present value of accelerated depreciation deductions revealed significant values across all farm types and asset classes. Because of accelerated depreciation use farmers realized decreased cost of capital from accelerated depreciation tax policies. Finally, farmer investments were most responsive in 7 and 10 year property from accelerated depreciation use.