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Basic depreciation rules for farm assets

Written by Scott Gammill Published on 24 May 2012


Farm facilities

In 2012, the law allows 50 percent first-year bonus depreciation for qualifying new assets that have a tax life of 20 years or less. The “placed-in-service” deadline is Dec. 31, 2012.

All farming and ranching equipment should be depreciated using the 150 percent declining balance method with half-year convention. The following list identifies the tax lives of various types of ag property whether it is new or used:

  • 20-year property – Includes farm buildings such as equipment sheds and barns.
  • 15-year property – Tiling, drainage improvements, retention ponds, underground irrigation systems, sidewalks, drives and roads, landscaping and non-farming fencing.
  • 10-year property – Single-purpose agricultural structures specifically designed for housing, raising and feeding a particular type of livestock.
  • 7-year property – Machinery and equipment, farming fencing and grain bins that are used in the performance of agriculture, animal husbandry and horticultural services such as the production of crops, plants, vines, trees or livestock.
  • 5-year property – General purpose trucks, trailers and computers.

The 50 percent first-year bonus depreciation rules apply for both regular tax and alternative minimum tax (AMT) purposes; therefore, assets subject to the bonus depreciation rules have exactly the same depreciation deductions for both regular tax and AMT.

A mower

Section 179 expensing

Farmers and ranchers need to be aware of the 179 expensing election for 2012. In contrast to qualified bonus depreciation property described above, Section 179 property can be either new or used.

The maximum dollar amount of assets that can be expensed is $139,000 (adjusted for inflation) with a phaseout threshold of $560,000.

As a planning note, if Congress does not extend this provision, beginning in 2013, the maximum deduction will be $25,000.

Eligible assets for the Section 179 deduction are similar to qualified bonus depreciation assets, with the exception of land improvements.

Conference attendees discuss a cattle squeeze

Nevertheless, farmers and ranchers may have assets that would qualify for the Sec. 179 deduction that might at first appear to be land improvements.

Some such assets include fencing, water wells, above-ground irrigation, wastewater improvements, grain bins, other storage tanks and silos.

It’s important to note that Section 179 expensing can be combined with bonus depreciation for an even greater tax benefit.

However, this deduction cannot create a net operating loss for the taxpayer. There is no such limitation on bonus depreciation deductions.

In the end, these tax provisions can impact your operation through 2012 and give you the opportunity to increase your after-tax cash flow and, ultimately, your bottom line. As always, for more information or specific questions about your situation, consult your tax professional or contact me.  end_mark

Author Scott Gammill has over 25 years consulting experience in tax depreciation matters, real estate and construction with an emphasis in agribusiness industries. This email address is being protected from spambots. You need JavaScript enabled to view it. to contact him or call (501) 975-0120. Click here for more information on agricultural accounting issues.

PHOTOS

With new depreciation laws on the books in 2012, producers should know the tax lives of their facilities, buildings, equipment and vehicles. Photos by Progressive Cattleman staff.

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