The Internal Revenue Code has specific sections concerning farmers and tax implications of a farming business. One such section addresses the depreciation of assets. This is the second article on depreciation. The first article is available at Depreciation, Part 1.
When Does Depreciation Begin and End?
You must begin depreciating property when you place the property into service in your business or use it to produce income. You must stop depreciating property when you have fully recovered your cost or when you retire the asset from service, whichever occurs first.
When is an Asset Placed into Service?
Property is placed in service when it is ready for its specific use. That specific use may be for a business activity, income-producing activity, personal activity, or tax-exempt activity. Even if the property is not being used, the property is considered placed in service when it is available for use.
Fruit, Nut Trees, and Vines
In the case of a grove, orchard, or vineyard, if you acquire the asset before it has reached an income-producing stage and it will be more than two years before the asset will be productive, you must capitalize the costs during the pre-productive period following the uniform capitalization rules. You begin to take depreciation when the plants reach an income-producing stage.
You can depreciate livestock when the livestock reaches the age of maturity. If you purchased immature livestock for use as draft animals, you must take depreciation when the animals are mature enough to be worked. If you purchased immature livestock for breeding or dairy purposes, you must take depreciation when the animals are mature enough to breed or produce milk. Your basis for depreciation is the purchase price of the livestock.
When property is temporarily idle, you must still claim depreciation on property used in your business or to produce income.
Full Recovery of Basis
You must stop depreciating property when you have full recovered your basis. This occurs when your allowed depreciation deductions equal your cost or investment in the property.
Property Retired from Service
You must stop depreciating property when it is retired from service, even if you have not fully depreciated the asset.
An asset is considered to be retired when you permanently withdraw it from use in your business or in the production of income for any of the following reasons:
- You sell or exchange the property
- You convert the property for personal use
- You abandon the property
- You transfer the property to a scrap account
- The property is destroyed
Use of MACRS Depreciation
You must use Modified Accelerated Cost Recovery Systems (MACRS) to depreciate most business property placed into service after 1986. You cannot use MACRS to depreciate the following property:
- Property placed into service before 1987
- Certain property used in 1986
- Intangible property
- Films, recordings, and video tapes
- Certain corporate or partnership property
- Property you elect to exclude from MACRS
Basis of Depreciable Property
To determine basis, you need to know the cost or other basis for property. The basis of purchased property is usually its cost plus additional amounts paid as a part of the purchase, such as tax, freight, and installation and testing fees. The cost is any amount paid in cash, services rendered, or debt obligations.
If you cannot use the cost of the asset, the basis is the fair market value adjusted for certain events that occur between the time you acquire the property and the time you placed the property into service.
Where can you additional help with your tax questions or preparation?
You can speak with a tax attorney to get answers to your questions or help in filing your tax return. A tax attorney will have the experience to answer your questions and how to work with the IRS to deal with difficult tax situations.
Call the telephone number at the top of this web site or complete the form below to get in touch with a tax attorney.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.