Property that you acquire while running your farm or ranch is often considered depreciable, meaning that the IRS allows your business to recoup a portion of the cost of the property each year over a specified useful life. To qualify, property must have a useful life of over one year and eventually wear out or become obsolete. This often includes structures, machinery, equipment, and livestock.
Over the last 35 years, depreciation lives and methods have been altered by Congress. The following steps should be followed for each asset placed in service on your farm or ranch:
1. Calculate the basis of your property. Typically, the basis will equal the initial cost, however, inheriting property, building property, or converting personal property for business use will affect its basis in a separate way. If the property was a gift, the cost is transferred to you.
2. Establish when the property was placed into service. This does not necessarily mean when you put the property into use, but instead when it is deemed ready and available for its exact use. Depending on the type of property, this date will vary. For example, fruit or nut tree’s depreciation begins when they reach the income-producing stage, while breeding livestock are depreciable when they reach maturity.
3. Determine the property’s class. There are nine classes depicting the property’s recovery period of useful life. The recovery period begins at three years for certain types of property and can extend to 39 years for others.
4. Select a depreciation method. There are multiple methods that you can choose when determining what portion of the property’s basis is claimed each year of the recovery period. The method used is typically based on the property’s class.
For assistance determining if your property qualifies and how to calculate depreciation for your business, seek the guidance of your tax advisor.
column by STEVEN E. CRISMAN
BIO: Steven Crisman is the managing partner of Cross, Fernandez & Riley, LLP’s (C/F/R) Winter Haven office and leads their Agriculture Practice Group. He primarily serves the agriculture, manufacturing, warehousing, and distribution industries. He has specific experience with citrus growers, cattle ranchers, citrus and other horticultural nurseries, citrus harvesters and other support industries as well as watermelon, blueberry and other growers. In addition, Steve provides comprehensive tax and estate planning, attestation and business succession planning services.