Depreciation allows farmers to deduct the cost of capital assets used in their business over time. It provides for the "cost recovery" of equipment, machinery, buildings, and other property through non-cash expense deductions. The document outlines the definition of depreciation and what types of assets can and cannot be depreciated according to IRS rules. It also explains the different depreciation methods like MACRS, straight line, and bonus depreciation that farmers can use to maximize tax savings.

1. Depreciation Basics
Holton Agriculture Education Department
Agribusiness Management Class
Jason M. Larison, Instructor

2. Depreciation
• Definition
– The allowance for wear and tear on equipment and
machinery
– Amount of decreasing value in a capital asset allowed
to be deducted from a business tax return
– Cost Recovery
• Rules
– The rules for farm business depreciation are located in
the Farmer’s Tax Guide (Publication 225) from the
IRS

3. What can be depreciated?
• You can depreciate property only if it meets the
following requirements:
– It is used in business or held for the production of
income.
– It must be expected to last for more than one year. In
other words, it must have a useful life that extends
substantially beyond the year it was placed in service.
– It is property that wears out, decays, gets used up,
becomes obsolete, or looses value from natural causes.
• Depreciable property can be either tangible or
intangible

4. Tangible Depreciable Property
• Purchased property you can see or touch
– Livestock (purchased)
– Machinery
– Buildings and improvements, fences
– Dams, ponds, or terraces
– Irrigation systems and water wells
– Partial business use
• You can claim depreciation on the part of a vehicle used in the
business (ex - 1/2 business value of a truck)

5. Intangible Depreciable Property
• Purchased property that has value that you
cannot readily see or touch
– Computer Software
– Copyrights, patents, etc

6. What cannot be depreciated?
• Property placed into service and disposed of in the
same year.
• Land (land can never be depreciated)
• Inventory
– You cannot depreciate property held for resale in the
normal course of business
• Leased property
– The value of the lease is already showing up as a rental
expense
• Raised Market Livestock (Because there is no cost
to recover)

7. Section 179 Deduction
• A total of $24,000 may be taken in a section
179 deduction.
– Once taken, the amount can no longer be
depreciated.
– You can however, depreciate out the balance if
the asset is over $24,000.
– Starting in 2003 the amount will be $25,000

8. When depreciation begins & ends?
• Begins
– When you “place the
property in service”.
– When it is ready and
available for a specific use
in the business
• Example
– When it was bought for the
business
• Ends
– When the cost of the item
has been recovered or when
it is retired from service,
whichever happens first
• Example
– When it is sold or is not
longer useable

9. Depreciation Methods
MACRS - Modified Accelerated Cost Recovery
System (Half Year Conventions)
• 150% Declining
Balance -
– Only Option
• GDS - General
Depreciation System
• Straight Line
– Either Option
• GDS - General
Depreciation System
• ADS - Alternative
Depreciation System
– Longer time for
depreciation

10. Depreciation Methods
Older (less common ways of depreciation)
• ACRS (Acellerated Cost
Recovery System)
– Used on Property Placed in
Service before 1987
– Cannot be used on property
placed in service after 1987
(you must use MACRS)
• Straight Line
– Standard method of
depreciation with a
similar amount taken
out each year
– Does not have the
advantage of a half
year convention which
means you must wait
to start later

11. Number of Years Allowed for
Depreciation
• Consult the Farmer’s Tax Guide (Publication 225)
to find out the specific lengths of time for
depreciation
– Cattle (Breeding) >> 5 yrs GDS, 7 yrs ADS
– Hogs (Breeding) >> 3 yrs GDS, 3 yrs ADS
– Fences >> 7 yrs GDS, 10 yrs ADS
– Single use farm buildings >> 10 yrs GDS, 15 yrs ADS
– Grain Bins >> 7 yrs GDS, 10 yrs ADS

12. Depreciation Percentages - 5 year
(Half Year Convention)
Half of Yearly Depreciation is allowed for year placed in service.
• 150% Declining Balance (DB)
– Year 1 - 15.00%
– Year 2 - 25.50 %
– Year 3 - 17.85 %
– Year 4 - 16.66 %
– Year 5 - 16.66 %
– Year 6 - 6.33 %
• Straight Line - Half Year
– Year 1 - 10 %
– Year 2 - 20 %
– Year 3 - 20 %
– Year 4 - 20 %
– Year 5 - 20 %
– Year 6 - 10 %

13. Advantages of the
Declining Balance Method
• More Depreciation Claimed early in the live
of the asset
– Year 1 would be 15 % versus 10 %SL
– Year 2 would be 25.5 % versus 20 % SL
***Good if you know you will have too much
income (problems) immediately in the next
couple of years

14. Advantages of Straight Line
• More depreciation expense is claimed per
year later in the life of the asset
– Year 5 would be 20 % versus 16.66% MACRS
– Year 6 would be 10 % versus 8.33% MACRS
**Good if you do not predict to have income
problems (need the depreciation) in the next
couple of years, but want to be safe in the
future

15. Advantages of ADS
• Allows for the depreciation to be spread out
over a longer number of years.
• Could be an advantage for emergency
purchases, i.e. - those not made for a direct
impact on income taxes (save it for later
when you might need it!)

16. Summary
• Depreciation allows “cost recovery” on capital asset
purchases in the farm business
• Depreciation is a non-cash expense on your schedule F
(farm profit or loss statement)
• Record Depreciation on Tax Form 4562
• Section 179 Deduction ($25,000 for 2003) - Allows a 1
time deduction to help on major farm purchases
• Two main methods - MACRS and Straight Line
• Know the rules - they are always changing, stay on top of
them so you can maximize your after-tax income.