Beginning with the 2012 tax year, Alabama farmers will be allowed a state income tax credit on the purchase and installation of qualified irrigation equipment, qualified reservoirs, or the conversion of irrigation equipment from fuel to electricity. The credit is 20 percent of the unreimbursed cost not to exceed $10,000. This credit is an Alabama income tax credit only. It does not affect federal income tax or self-employment tax.
To qualify for this credit, you must be an Alabama taxpayer who is an agricultural business qualifying under the North American Industry Classification System sector 11 designation, and the activity must conform to existing environmental and water laws of Alabama. Qualifying property for this credit includes the following:
• Qualified Reservoirs: An off stream upland pond or lake whose sole purpose is as a source of water for irrigation.
• Qualified Irrigation Equipment: Equipment used in irrigation systems including equipment used to construct irrigation systems and water wells such as pivots, pumps, pipes, wells, electrical equipment, etc.
• Conversion of irrigation equipment from fuel to electricity.
This credit is for tax years beginning after December 31, 2011, and can only be taken in the year the system has been placed in service, meaning it cannot be carried back or forward. The placed-in service date is the date the property is ready and available for specific use. It is not necessarily the date it is first used. A taxpayer is only allowed to take this credit once. It is a nonrefundable credit. Also this credit allows you to take Section 179 expense or bonus depreciation on an item and claim the credit in addition.
The following example demonstrates how this tax credit may affect a typical farm family. John owns a 1,000-acre row crop farm. He is married to Jane who is a teacher. They file a married filing joint tax return. Jane receives W2 wages in the amount of $50,000 and they have interest income in the amount of $2,500. John has Schedule F earnings before depreciation in the amount of $100,000. His prior year’s depreciation is $65,000 and his 2012 capital purchases include a $35,000 planter, a $70,000 tractor, a $50,000 well for irrigation and a $100,000 center pivot. If John does not elect to take any state Section 179 expense or bonus depreciation, their Alabama taxable income for 2012 is $54,462 and their state tax liability equals $2,683. John qualifies for the maximum irrigation tax credit of $10,000 ($150,000 x 20% = $30,000), but since this credit is nonrefundable and can’t be carried forward he is only allowed to offset his 2012 tax liability of $2,683, so his irrigation tax credit is $2,683.
To maximize this credit, they would need an Alabama taxable income of $200,000, and, assuming their W2 wages and interest income remain the same, John’s state Schedule F would have to show net earnings of $228,000 to take full advantage of the credit.
Since everyone’s tax situation is different, you should meet with your individual tax preparer before the end of the year so you have time to develop a plan best addressing your individual tax situation.
The items covered in this article are informational only and are not meant as tax, legal or financial advice; consult with your tax professional, lawyer or financial consultant for guidance on issues specific to your situation.
The author is an Extension Economist with the Alabama Cooperative Extension System. For more information about farm management and financial analysis, please contact your County Extension Coordinator or an Extension Specialist: North Alabama: Holt Hardin, 256-574-2143 or Robert Page, 256-528-7133; Central Alabama: Jamie Yeager, 334-624-4016; Southwest Alabama: Steve Brown, 251-867-7760; Southeast Alabama: Thomas Hall, 334-693-2010.