Tax Guide for Farmers – Capital Expenses

The Internal Revenue Code provides the laws that govern the reporting of federal income tax. For those with a farming business, the code includes sections on farming-related income and expenses. One such section, which is the subject of this article, includes capital expenses.

Capital Expenses

A capital expense is an expense made to acquire, improve, or restore an asset to working condition that is expected to last more than one year. Such an expense is included in the basis of the asset.

Capital expenses are generally not deductible, but they are usually depreciable. A capital expense may be deductible if the expense is for one of the following:

  • Fertilizer or lime costs
  • Forestation and re-forestation costs
  • Soil and water conservation costs
  • Cost of property that qualifies for a deduction under Section 179
  • Costs to start up a business

Typically, the following expenses, including labor, materials, and installation, are capital expenses:

  • Additions, alterations, and improvements to buildings
  • Cars and trucks
  • Drilling and equipping water wells
  • Equipment and machinery
  • Fences
  • Land and buildings
  • Land preparation costs, including building irrigation, building roads, clearing, constructing reservoirs or dams, installing drainage systems, laying irrigation pipes, leveling, modifying or diverting streams, or purchasing and planting trees
  • Livestock used for breeding, dairy, draft, or sport purposes
  • Repairs to cars, equipment, trucks, or machinery that alter their purpose, extend their useful life, or increase their value

Business Start-Up and Organizational Costs

You can deduct up to $5,000 in business start-up costs and $5,000 in organizational costs, so long as those costs were incurred after October 22, 2004. The $5,000 deduction is reduced by any amount of total startup and organization costs exceeding $50,000.

Crop Production Expenses

Capitalization rules typically require you to capitalize expenses incurred in producing plants. However, the capitalization rules do not apply to plants with a preproductive period of two years or less.

Timber

You must capitalize the cost of acquiring timber. These costs can include the cost of reforestation, but they do not include the cost of land.

Reforestation costs include depreciation on equipment used in planting or seeding, costs incurred to replace lost seedlings, site preparation costs (e.g., applying herbicide, baiting rodents, clearing brush), cost of seeds or saplings, and labor and tool expenses.

The amount you capitalize is your basis in the timber. You can recover your basis when you sell the timber or elect to take depletion allowances when you cut the timber.

You can elect to deduct up to $10,000 of qualified reforestation costs paid or incurred after October 22, 2004, for each qualified timber property.

Christmas Tree Cultivation

If you are raising Christmas trees for the purpose of selling them once they are at least six years old, capitalized expenses include costs of planting and stump culture, which are added to the basis of the trees. You recover these expenses as part of the adjusted basis at the time you sell the trees or as a depletion allowance when you cut the trees.

You can deduct as a business expense the costs for shearing and basal pruning of the trees, as well as weeding, cleaning, and noncommercial thinning.

You need to capitalize the cost of land improvements (e.g., ditch digging, creating fire breaks, and road grading) it the improvements have a useful life beyond the current tax year. If the improvements do not have an identifiable useful life, include the cost of the improvements in the basis of the land. The cost is recover when you sell or otherwise dispose of the land.

How can I get more help on capital expenses related to my farming business?

You can get the help you need on capital expenses or other tax subjects by speaking with a tax attorney. A tax attorney is someone who has training and expenses on applying tax laws to business situations such as those encountered in a farming business.

By calling the telephone number at the top of this web site or completing the form below, a tax attorney can get in touch with you to give you the help you need. The initial consultation is free of charge, completely confidential, and does not obligate you to anything further.

Therefore, you have every reason to make the call to get the help you need today.

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by Mark Johnston

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.