Farm Equipment Depreciation: Section 179, Bonus Depreciation, and MACRS

Farm equipment is one of the largest capital outlays a farmer makes, and the tax treatment of that equipment is one of the most powerful levers on the return. A single combine can cost $400,000 or more. Tractors run $75,000 to $300,000 depending on size. Grain bins, fencing, drainage tile, and farm buildings add up quickly. The tax code offers three primary mechanisms to recover these costs: Section 179 expensing, bonus depreciation, and regular MACRS depreciation. Understanding how each one works, how they interact, and which to elect first is essential to building a farm tax plan that captures the full benefit.

What qualifies for Section 179 expensing?

Section 179 under IRC 179 lets you deduct the full cost of qualifying property in the year it’s placed in service, up to the annual limit, instead of depreciating it over multiple years. For 2025, the maximum Section 179 deduction is $2,500,000 (significantly expanded by the One Big Beautiful Bill Act from the prior $1,250,000 limit). The phase-out begins at $4,000,000 in total qualifying property placed in service during the year, meaning the $2,500,000 limit is reduced dollar-for-dollar once your total qualifying purchases exceed $4,000,000.

Qualifying property for farms includes tangible personal property used in the farming operation: tractors, combines, planters, tillage equipment, sprayers, grain carts, trucks, trailers, and virtually any machinery or equipment used in crop production or livestock operations. Off-the-shelf computer software (such as farm management programs) also qualifies. Single-purpose agricultural structures qualify as well, including grain bins, grain storage facilities, poultry houses, hog confinement buildings, greenhouses used for commercial production, and other structures designed exclusively for a specific agricultural purpose. The IRS defines “single-purpose agricultural structure” under IRC 168(i)(13) as a structure exclusively used for housing, raising, or feeding livestock or for housing equipment used in that function, or a structure used to grow horticultural commodities in an environmentally controlled enclosure.

What does not qualify for Section 179 is equally important. Land never qualifies (land is not depreciable). General-purpose farm buildings such as barns, machine sheds, and farm shops do not qualify for Section 179 because they’re “real property” and are not single-purpose structures. Fencing, roads, and drainage tile are land improvements that don’t qualify for Section 179 either (but they have their own depreciation rules discussed below). Residential rental property, even a farmhouse rented to a hired hand, is excluded.

The critical limitation on Section 179 is the income cap. The Section 179 deduction cannot exceed your taxable income from all active trades or businesses during the year. If your Schedule F plus any Schedule C income, W-2 wages, and other active business income totals $120,000 before depreciation, your Section 179 deduction is capped at $120,000, regardless of how much qualifying equipment you purchased. Section 179 cannot create or increase a net operating loss. Any amount that exceeds the income limitation carries forward to future years indefinitely, but it’s still subject to the income limitation in those future years.

How does 100% bonus depreciation work for farm equipment?

Bonus depreciation under IRC 168(k) allows you to deduct a percentage of the cost of qualifying property in the year it’s placed in service, on top of (or instead of) regular MACRS depreciation. The One Big Beautiful Bill Act (signed July 4, 2025) restored 100% bonus depreciation and made it permanent for property acquired and placed in service after January 19, 2025.

Before the Act, the TCJA’s bonus depreciation rate had been phasing down each year, and was on track to reach zero by 2027. The OBBBA eliminated that phase-down entirely, restoring 100% bonus depreciation permanently with no scheduled sunset. The 100% rate applies to qualifying property acquired and placed in service after January 19, 2025.

Used equipment qualifies for bonus depreciation. Since the TCJA in 2017, used property has been eligible as long as it’s new to you (you haven’t previously used the specific asset in your business). A used combine you buy from another farmer at auction qualifies. A truck you’ve leased for two years and then buy at the end of the lease does not (because you already used it).

Qualifying property for bonus depreciation in the farming context includes MACRS property with a recovery period of 20 years or less. That covers all farm machinery and equipment (7-year), light trucks (5-year), single-purpose agricultural structures (10-year), land improvements like fencing and drainage tile (15-year), and general-purpose farm buildings placed in service after 2017 (20-year under ADS, or 15-year for certain improvements). It does not include residential rental property (27.5-year) or nonresidential real property (39-year), unless it qualifies as qualified improvement property.

The decisive advantage of bonus depreciation over Section 179 is that bonus depreciation has no income limitation. It can create or increase a net operating loss (NOL), and that NOL can be carried forward indefinitely to offset future income (it can no longer be carried back under current law, except for certain farming losses under IRC 172(b)(1)(B), which allows a two-year carryback for farm NOLs). This means a farmer who buys $400,000 of equipment in a year with $200,000 of farm income can deduct the full $400,000, generate a $200,000 farm loss, and carry it forward. Section 179 would have capped the deduction at $200,000 in that scenario.

What are the MACRS recovery periods for farm assets?

When you don’t elect Section 179 or bonus depreciation (or for the portion of an asset’s cost not covered by those elections), the asset is depreciated over its MACRS recovery period using either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS). Most farmers use GDS, which provides faster recovery. ADS is required for certain purposes (such as calculating earnings and profits for corporate farmers, or when property is used predominantly outside the US) and is elected voluntarily by some farmers to create smoother, more predictable depreciation streams.

The key recovery periods for farm assets under GDS are as follows:

• 5-year property: automobiles, light-duty trucks (under 13,000 lbs GVW), computers, and certain technological equipment.
• 7-year property: most farm machinery and equipment. This is the workhorse category and includes tractors, combines, planters, tillage tools, sprayers, grain carts, irrigation equipment (pivots, pumps, pipe), hay equipment (balers, mowers, rakes), and general-purpose farm tools. Office furniture also falls here.
• 10-year property: single-purpose agricultural structures (grain bins, poultry houses, hog confinement buildings, greenhouses for commercial production), fruit-bearing trees, and nut-bearing trees (the tree itself, not the land). Mobile homes used in the farm operation.
• 15-year property: land improvements including fencing, farm roads, drainage tile, water wells, paved yards, bridges, and certain farm buildings. Qualified improvement property (QIP) also has a 15-year recovery period.
• 20-year property: general-purpose farm buildings such as barns, machine sheds, and farm shops placed in service after 2017. These are “real property” and are classified as 20-year property under MACRS GDS.
• 27.5-year property: residential rental property, including a farm dwelling rented to a tenant or hired hand.

Grain bins and single-purpose agricultural structures occupy a favorable position. As 10-year property, they’re eligible for both Section 179 and bonus depreciation. A farmer who erects a $300,000 grain bin can expense the entire cost in the year it’s placed in service using either Section 179 (subject to the income limitation) or 100% bonus depreciation (no income limitation). Without those elections, the bin depreciates over 10 years using the 200% declining-balance method.

Land improvements (15-year property) are not eligible for Section 179 but are eligible for bonus depreciation. A $100,000 drainage tile project placed in service after January 19, 2025, qualifies for 100% bonus depreciation and can be fully deducted in the year completed. The land improvement guide covers the specifics of drainage, irrigation, and conservation improvements.

How do I decide between Section 179 and bonus depreciation?

The ordering decision is one of the most important tactical choices on a farm return, and getting it wrong doesn’t reduce total depreciation (you’ll deduct the full cost eventually either way), but it can cost you tax savings in the current year or create problems on state returns.

Section 179 is elected first. You choose which specific assets to apply it to and how much to deduct on each asset (any amount from $1 up to the full cost, up to the overall $2,500,000 limit). This precision is Section 179’s strength. You can fine-tune the deduction to match your income, avoiding an NOL if that’s strategically undesirable (for example, if you’re in a state that doesn’t allow NOL carryforwards or has its own limitations).

Bonus depreciation is then applied to the remaining cost of qualifying assets. Bonus depreciation is all-or-nothing on a per-class basis. If you want to elect out of bonus depreciation, you must elect out for the entire class of property (all 7-year property, for instance, not just one tractor). You can’t elect 50% bonus on one combine and 100% on another if they’re in the same asset class and recovery period.

The practical strategy for most farmers is to use Section 179 when you want to control the exact amount of the deduction (to manage your income level for purposes of tax credits, income-based phase-outs, or state tax conformity) and let bonus depreciation handle the rest. In many cases, bonus depreciation alone covers everything, and Section 179 is unnecessary. But Section 179 remains important in several scenarios: when state law doesn’t conform to federal bonus depreciation (some states decouple and require you to add back bonus depreciation on the state return but allow Section 179), when you want to avoid generating an NOL, or when you need to target specific assets for full expensing while spreading depreciation on others.

What happens when I dispose of depreciated equipment?

Depreciation recapture is the other side of the coin. When you sell, trade, or otherwise dispose of farm equipment that you’ve depreciated (including Section 179 and bonus depreciation), the gain attributable to the depreciation you took is recaptured as ordinary income under IRC 1245. This is not capital gain. It’s taxed at your ordinary income tax rate and is also subject to self-employment tax if the equipment was used in your farming operation.

The calculation is straightforward. Your adjusted basis in the equipment is the original cost minus all depreciation taken. If you took 100% bonus depreciation on a $350,000 combine, your adjusted basis is zero. If you sell that combine three years later for $180,000, the entire $180,000 is recaptured as ordinary income under Section 1245, because the depreciation you claimed ($350,000) exceeds the gain ($180,000).

This doesn’t mean accelerated depreciation is a bad deal. You got the full $350,000 deduction in year one, which saved taxes immediately. The $180,000 recapture happens years later. The time value of money makes the early deduction worth more than the later recapture, especially if your tax rate is lower in the year you sell (perhaps due to income averaging under Schedule J, or because it’s a lighter farming year). The Schedule F guide explains how income averaging can soften the recapture hit.

If equipment is converted from business use to personal use before the end of its recovery period, the excess depreciation over what straight-line would have produced must also be recaptured. This is uncommon for commercial farm equipment (nobody converts a combine to personal use), but it can arise with farm trucks or ATVs that shift to personal use.

Like-kind exchanges under IRC 1031 can defer recapture when you trade one piece of farm equipment for another of like kind. However, the TCJA limited Section 1031 to real property only, effective for exchanges completed after December 31, 2017. Farm machinery and equipment (personal property) no longer qualifies for like-kind exchange treatment. Only real property (farmland, buildings) qualifies. This change made depreciation recapture on equipment dispositions unavoidable unless the equipment is sold at a loss.

Does the hobby loss rule affect depreciation?

If your farming operation is classified as a hobby (not engaged in for profit) under IRC 183, your depreciation deductions are limited to farm income. You cannot use depreciation (or any other farm expense) to create a loss that offsets other income. The IRS presumes a farming activity is for profit if it shows a profit in three out of five consecutive years (two out of seven for horse breeding and racing), but this is a presumption, not a guarantee. If the IRS challenges your profit motive, you need to demonstrate businesslike conduct, effort, and a reasonable expectation of profit.

The hobby loss limitation hits depreciation especially hard because depreciation is often the deduction that turns a small profit into a loss. A part-time farmer who shows $20,000 of crop sales and $15,000 of cash expenses has $5,000 of net income before depreciation. If the farmer also bought a $100,000 tractor and wants to deduct it all through bonus depreciation, the resulting $95,000 loss would attract IRS scrutiny. The hobby loss and IRS audit defense guide covers how to structure and document your operation to withstand a hobby loss challenge.

What about state tax differences?

State conformity to federal depreciation rules varies widely, and this is where Section 179 vs bonus depreciation planning becomes critical. Some states fully conform to both Section 179 and bonus depreciation. Others conform to Section 179 but decouple from bonus depreciation (requiring you to add back the bonus amount on the state return and depreciate over the regular MACRS life instead). A few states have their own Section 179 limits that are lower than the federal amount.

If you farm in a state that decouples from bonus depreciation, electing Section 179 (which the state does allow) may produce a better combined federal-plus-state result than relying on bonus depreciation (which the state disallows). This is an asset-by-asset analysis that depends on the state’s specific rules, your state tax rate, and whether the state allows an NOL deduction. Your tax advisor should model both scenarios.

What should I do next?

The depreciation rules for farm equipment are generous, but capturing the full benefit requires intentional planning. The timing of equipment purchases, the choice between Section 179 and bonus depreciation, the interaction with income averaging, and the state-tax implications all affect the bottom line. A tractor purchase timed for late December produces the same federal deduction as one timed for early January, but the cash flow and state tax effects can be very different.

These guides cover the related topics:

• Schedule F: reporting farm income and expenses, where depreciation deductions are reported and how they reduce both income tax and self-employment tax
• Farm income averaging and Schedule J, how to spread a high-income year (including recapture income) over prior years
• Hobby loss rules and IRS audit defense, how the profit-motive test limits depreciation and other deductions for part-time farming operations
• Land improvements, drainage, and irrigation, the depreciation and expensing rules for fencing, tile, wells, and conservation improvements
• Renewable energy tax credits for farmers, how the Investment Tax Credit and Production Tax Credit stack with the bonus depreciation and Section 179 rules covered here for solar, wind, and biofuel property
• Farm tax deductions and expenses, the full list of deductible farm operating costs beyond equipment, from seed and fertilizer to hired labor and insurance

Related guides:

• Farm Commodity Hedging Futures Tax Treatment
• Farm Conservation Easement Tax Deduction
• Farm Crop Insurance Disaster Payments Tax
• Farm Estate Planning Succession Irc 2032A
• Farm Ethanol Biodiesel Renewable Energy Tax Credits

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.