Depreciating Farm Assets
Just about every farmer has had this thought: I’m making a little money this year, so I better go out and buy something. Every year in early December, clients start calling to ask, “Should I buy something?” I always respond, “Do you need it?” I explain that it never makes financial sense to spend $3 for no reason other than to save $1. You’ll still be out $2. However, if you are going to buy the truck, tractor, or other equipment anyway in the next 12 months, then, yes, go ahead and make the purchase during the year you know you have excess profit.
In recent years, profit has dried up on many farms, so the correct strategy may not be to go buying and writing off equipment just as fast as you can. To understand the write-off options, you have to understand depreciation.
Depreciation is a concept introduced by accountants to recognize the decline in the value of assets over their estimated useful lives. Most farm equipment will have a five-year life for tax purposes.
However, some farm assets (like fencing and grain bins) have seven-year lives. Farm buildings can be written off over either 10 or 20 years, depending on what they’re used for. Land improvements (drain tiles and berms, for example) can be depreciated over a 15-year period.
The IRS allows an accelerated method called MACRS to calculate the depreciation. It shifts more of the write-off into the first few years, rather than taking it evenly throughout the depreciable life.
An equal deduction each year is called straight-line depreciation, and you are allowed to choose that method, especially if you are trying to slow down the deduction.
Why would you do that? Because you may be losing money right now, and you expect more profitable years ahead.
If this was all there was to think about, depreciation would be easy. You would buy something, and it would definitely be depreciated over five, seven, 10, 15, or 20 years.
There are two more wild cards that make your depreciation situation much more complicated: Section 179 and Bonus Depreciation.
Section 179 says you can write off all or a portion of the assets you purchase immediately, so long as they don’t throw your net income into the negative. The deduction is limited to $500,000 for 2016. It has been in play for many years, and the limit was only $24,000 as late as 2002.
Bonus Depreciation is a fairly new concept created in 2003. In an effort to stimulate the economy, Congress and the Treasury Department created a new write-off to allow you to immediately expense 50% of the cost of new assets. When I say “new,” the item must be brand new. It also cannot be a residential or commercial building, like an apartment building or a store.
The powerful part about Bonus Depreciation is that there are no limits on how much of it you can take.
(Big operators can get big deductions.)
Bonus Depreciation has been temporarily extended over and over again since its inception, but it may go away completely someday.
The end result of all of these write-off options is that your CPA can give you just about any depreciation write-off you want, provided you actually bought some assets during the year.
Just remember: Never spend $3 to save $1.