How much is New York's 20% farmer investment tax credit worth today?

Implications for capital investment and tax management decisions

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Cornell Cooperative Extension
PRO-DAIRY
Animal Science

This fact sheet authored by PRO-DAIRY business management specialist Mary Kate MacKenzie was shared in the April 2025 PRO-DAIRY e-Leader newsletter, distributed to an email list of nearly 7,000 dairy producers, agriservice, and legislators.

In April of 2022, New York State expanded the farmer investment tax credit (ITC) to be worth 20 percent of eligible capital investment. For property placed in service on or after January 1, 2023, the ITC is fully refundable for taxpayers who earn more than two-thirds of their gross income from farming. Many asset types are eligible for the ITC, so long as they have a useful life of four years or more and are used primarily in agricultural production. Investments in land, passenger vehicles, and buildings used for other purposes (e.g. farmworker housing) are ineligible at this time.

Expansion of the ITC has generated enthusiasm among producers who rightly view it as an incentive to reinvest in their farms. However, in some cases this enthusiasm may be inflated by cognitive biases known as the “scarcity effect” and the “money illusion”. Studies in human psychology show that people place a higher subjective value on things that are perceived to be scarce or limited in availability. Based on this research, marketing firms use the scarcity effect to stimulate consumer demand and drive impulsive purchasing decisions by deliberately creating temporary conditions of scarcity. The short-lived price discounts applied to a wide range of products on Cyber Monday illustrate how online retailers use the scarcity effect to drive billions of dollars of consumer purchases in a single day.

The money illusion refers to the tendency to focus on the face value of money rather than its true purchasing power. For example, consider an employee who receives a 3 percent pay raise and is happy to deposit a larger paycheck into their account each week. If the rate of inflation is 5 percent, then that employee’s purchasing power has declined, even as the dollar value of their paycheck increased.

In theory, the ITC could trigger these biases to influence capital investment decisions on farms. The ITC is currently legislated to continue through 2027. If farm managers perceive the tax credit to be a time-limited resource, they may place a higher subjective value on it, feeling a sense of urgency to take advantage of the credit before it goes away. If managers focus on the face value of the 20 percent credit rather than its purchasing power, they will overestimate the credit’s true worth. The following example demonstrates how farm managers can determine the real economic value of the ITC at the time an asset is purchased to support sound investment decisions.

EXAMPLE

Assume that a New York dairy bought a new chopper for $800,000 in June of 2024, knowing the investment would trigger a $160,000 refundable tax credit. If the farm operator claims to have purchased the $800,000 chopper for only $640,000, we can infer that he has been misled by the money illusion. To calculate the real cost of the copper at the time of purchase, the farm must account for future tax implications of the credit, and for the time value of money.

Most would agree that $100 today is worth more than $100 a year from now. The time value of money reflects the fact that $100 today can be invested for a financial return, and that $100 a year from now will have less purchasing power due to inflation. This concept applies to the ITC due to the lag between the time when a farm makes an investment and the time when it receives the credit. Using a net present value framework, the future value of the tax credit can be discounted to its value at the time of the investment, given some assumptions about the farm’s annual discount rate and how long it will take for the credit to arrive.

Not only must farms wait to receive the ITC, but they must also pay tax on it. For example, the farm that purchased the $800,000 chopper in 2024 might receive their $160,000 credit in 2025, then pay federal income tax on the refundable portion of the credit in 2026. The amount of tax owed will depend on how much of the credit was refunded, and on the taxpayer’s marginal tax rate.

The net present value of the NYS investment tax credit as a percentage of the total investment for eight marginal federal income tax rates ranging from zero to 37%, and five after-tax discount rates ranging from zero to 20% in five % increments.

Comparison of the monthly debt service for two borrowing scenarios.

Table three compares the net present value after tax of two tax management strategies for depreciating an 800,000-dollar capital investment.

TABLE 1. The net present value of the NYS investment tax credit as a percentage of the total investment for eight marginal federal income tax rates.

TABLE 2. Comparison of the monthly debt service for two borrowing scenarios.

Table 3. Comparison of the net present value after tax of two tax management strategies for depreciating an 800,000-dollar capital investment.

IMPLICATIONS

Profitability

Farm managers should take away three important lessons from this example. First, be aware of the potential for cognitive biases to influence your own decision making. Remember that the 20 percent ITC is not worth the full 20 percent in today’s dollars at the time of the investment. Ensure that all capital investments make sense from an operational and financial perspective, given the real economic value of the credit. Even with the credit, the farm still pays for the majority of an investment, and all business investments should generate an acceptable rate of return.

Cash flow

Most farms are likely to receive some or all of the ITC as a refundable credit, which creates a future federal income tax liability. This tax bill may become a cash flow problem if the farm is unprepared. Discuss the future income tax implications of the ITC with your tax accountant. If there are concerns about generating sufficient cash flows from operations to make the tax payment, consider saving a portion of the ITC to ensure that the business has sufficient liquidity to cover the tax bill when it comes due.

Debt service

Some farms may look to the ITC to lower the cost of financing a large capital project. Consider a dairy seeking to finance a $6 million parlor investment. What happens if the farm needs the resulting ITC, valued at $1.2 million, to bring the debt service down to a manageable level? First, the farm must solve the problem of how to structure financing given the delay between the capital purchase and the ITC payment. For the sake of simplicity, assume the lender offers a short-term $1.2 million bridge loan at 8 percent interest, with interest-only payments. The interest payments would be $8,000 monthly, or $96,000 annually, until the farm receives its ITC and uses it to pay off the loan.

Table 2 shows the monthly debt service to finance the full $6 million over 20 years compared to financing $4.8 million over 20 years plus paying interest on a bridge loan. The difference between the two financing scenarios is relatively small, around 4 percent, until the ITC arrives. If the farm does not generate sufficient earnings to service the debt on a $6 million loan, it may struggle to make payments on a $4.8 million loan while paying interest on the bridge loan. Furthermore, the timing of the ITC payment is uncertain, and it could take more than a year to arrive if the farm’s claim is audited.

This example illustrates that, although the ITC can help to bring down the total cost of financing a large capital investment over time, farms may still face short-term financing challenges due to the lag between making a capital purchase and receiving the tax credit. The income tax liability triggered by a large tax credit may also impact a farm’s repayment capacity. Assuming a 24 percent marginal tax rate, the farm in this example could owe an additional $288,000 in federal income tax on the $1.2 million state tax credit.

TAX MANAGEMENT

Many farms are taking the ITC into account when making capital investment decisions. However, the choice of whether to claim the ITC is not finalized until income taxes are filed. This decision is complicated by the fact that a taxpayer may not use Section 179 to depreciate an investment on their federal tax return if they claim the ITC for that same investment on their New York State tax return, although bonus depreciation is permitted. Some farms and tax preparers may be tempted to maximize Section 179 depreciation to reduce their current year tax bill, or to avoid paying federal income tax on the ITC in the following year. However, in many cases, this strategy may be shortsighted.

If a tax planning goal is to minimize lifetime taxes paid, then we must consider how today’s tax management decisions will impact not just the current year, but also future year tax liabilities. For example, if a farm uses Section 179 to depreciate their $800,000 chopper investment in one year, then not only do they give up the $160,000 credit, but also, they lose the opportunity to use some of that depreciation against future year tax liabilities. To compare the long-term impacts of two different tax management strategies, we can calculate the total net present value, after tax, of all future tax benefits. Table 3 provides an example.

Scenario 1 in Table 3 claims the 20 percent ITC on an $800,000 investment and uses MACRS with 40 percent bonus depreciation to depreciate the investment over six years. Scenario 2 uses Section 179 to depreciate the full value of the $800,000 investment in one year. This example assumes a higher total marginal tax rate for Scenario 1 in the first year, a 32 percent total marginal tax rate for both scenarios in subsequent years, and a 10 percent pre-tax discount rate. It also assumes the entire ITC is refunded to the taxpayer and will be taxed at 24 percent in the following year. By maximizing Section 179 depreciation, the farm pays $137,909 less in income and self-employment taxes in the first year under Scenario 2 (line E). However, after accounting for the value of the ITC, the taxpayer will be $22,091 better off in year one under Scenario 1 (line G). Adding the discounted future tax benefits of depreciation makes Scenario 1 look even better. In this example, accounting for the discounted value of all future tax benefits and costs, the farm will be $89,276 better off in today’s dollars if they take the ITC (line O).

CONCLUSIONS

The investment tax credit is an excellent tool for New York farmers to reduce the cost of investment in livestock, machinery, equipment, and buildings used for farming. While the real economic value of the ITC is less than 20 percent at the time a capital purchase is made, that should not discourage producers from utilizing it. An awareness of the role cognitive biases play in decision making can help to improve management decisions, along with using a net present value framework to consider the total value of all future tax benefits and costs.