One of many farm business tax deductions is depreciation.
Depreciation is a tax deduction that allows a way to recover the cost of certain types of property that are used for business.
In agriculture, examples of assets that are depreciable include buildings, vehicles, machinery, equipment, fences, drainage tiles, other land improvements, and breeding livestock. Land is not depreciable; nor is market livestock, crop inventories, materials or supplies.
The calculation of depreciation utilizes the asset’s original cost and requires the projection of useful life and estimation of salvage value. Salvage value equals the asset’s worth after it has been fully depreciated. For some assets, salvage value is zero.
There are many rules that are followed when filing taxes and filing depreciation on a piece of personal property.
According to the Internal Revenue Service, the purpose of depreciation is to calculate an asset’s reduction in value because of age, use, wear, or obsolescence. To be depreciable property must meet all of these requirements:
• The farmer must own the property or capital improvements to a property that is being leased.
• The farmer must use the property for business.
• The property must have a valuable life greater than a year.
Depreciation can begin when a farmer places a piece of property in service for making an income.
The property will stop being able to be depreciable when the farmer has fully recovered the cost of the equipment or when the farmer retires it from service, what ever comes first.
“The rules vary based on everything from: what the item is, price of the item, how the item is used, what part of the country the item is used, and is the item new or used,” Rogers, Ark., CPA Mike Wilson said.
The IRS has a depreciation schedule and it calculates how long and how much a farmer can deduct on that piece of equipment.
“Find a trusted accountant to work along with while doing your taxes,” said Northwest Arkansas farmer George Anderson. “It is a very complex system and it benefits to have a respectable accountant to walk you through the process.”
Methods of Depreciation
Several methods exist for calculating depreciation. The method chosen depends on the asset and how the asset is being used.
Common methods of depreciation are as follows:
Straight Line Depreciation
Same depreciation is charged over the entire useful life.
Reducing Balance Depreciation
Depreciation expense decreases at a constant rate as the life of an asset progresses.
Sum of the Year’ Digits Depreciation
Depreciation charge declines by a constant amount as the life of the asset progresses.
Units of Activity Depreciation
Depreciation charge varies each period in proportion to the change in level of activity.
Managers should be aware that calculating an asset’s depreciation for economic purposes is different than calculating depreciation for tax purposes.
