Introduction

Modern US commercial farms have large capital investments in depreciable property including machinery, equipment, buildings, facilities and land improvements. Income tax depreciation policy affects the cost of investment capital by shifting the recovery period closer to – or into – the current tax year. In 1981, Section 179 depreciation deductions were instituted into the US tax code. In 2002, “bonus depreciation” was added as another form of accelerated depreciation. Both forms of accelerated depreciation allow farmers to take large amounts of depreciation in the first year relative to the default tax depreciation. Accelerated depreciation deductions allow farmers to decrease their taxable income by moving cost recovery of long-lived assets into the current tax year, thus increasing after tax income and incentivizing investment in depreciable farm business assets. The role of tax policy in influencing business investment has been a frequent topic of past economic research. Hall and Jorgenson (1967) concluded that tax policy was effective in changing the level, timing, and composition of investment. Chisholm (1974) found that increased levels of depreciation encouraged the investment behavior. Kay and Rister (1976) calculated the present values and concluded that accelerated depreciation affected the investment value. Weersink and Stauber (1988) examined optimal farm combine replacement finding that initial tax deduction and length of cost recovery changed the optimal replacement interval. Ariyaratne and Featherstone (2009), examining Kansas farm businesses from 1998 to 2007, found that the addition of machinery and equipment and listed property depreciation was a strong determinant of investment decisions. House and Shapiro (2008) estimated aggregate investment supply elasticity and found that investment in qualified capital increased sharply with the use of accelerated depreciation. Hadrich et al. (2013) studiedmachinery investment by farmers in North Dakota concluding that Section 179 had a large effect. However, their analysis ignored bonus depreciation and did not actually observe the use of Section 179 instead assuming that farm annual investment must be at least equal to the allowance limit for its use. Williamson and Stutzman (2016) used a synthetic panel data and examined accelerated depreciation policies concluding these policies had small impacts as few farms made total annual capital purchases close to the maximum allowance. In contrast to past research on these tax depreciation policies, we neither assume nor estimate the use of Section 179 and bonus depreciation. Instead, we observe the actual use for a balanced panel of farms. The data set used in this research is unique in its detail and also the inclusion of investment, financial, and tax depreciation information at the farm level. The data span 11 years from 2004 to 2014. This research examines the use of accelerated depreciation by asset class, year and farm type and measures the benefits farmers realized. The objectives are to: examine the extent to which and when farms utilized accelerated depreciation; calculate the after tax present value of accelerated depreciation deductions; and calculate the realized decreased cost of capital from these tax policies and implications for investment. The next section briefly examines the history of accelerated depreciation policies for US farm managers and mechanics of using accelerated depreciation compared to the default depreciation methods. The third section examines the panel data set of Michigan farms. Summary statistics on farm taxable income, investment, and depreciation choices by year, class, and farm type reveal the frequency and magnitude of accelerated depreciation use. The fourth section calculates the present value of accelerated depreciation relative to default IRS depreciation by year, class and farm type. The effect of accelerated depreciation on the cost of capital is examined using a model based on Hall and Jorgensen (1967). Finally, the investment implications of a reduction in cost of capital are discussed.