Tax Tips Department

 

Tax Benefits from Raising Elk

by Sue Whittlesey

 

One of the many tax benefits from raising elk is the ability to depreciate business assets and to take the Section 179 deduction that allows you to fully write off a certain amount of depreciable assets in the year of purchase. This article answers many of the questions which you may have about depreciation of farm assets.

 

Generally, what can be depreciated? 

                1.  The property must be used in business or held for the production of income.

                2.  The property must have a determinable useful life of more than one year.

                3.  The property must be something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes.

 

What types of farm and ranch property can be depreciated?

                1.  Livestock that is purchased for work, breeding, or dairy purposes and which is not kept in an inventory account may be depreciated.

                2.  Raised livestock usually has no depreciable basis because the costs of raising it are deducted as expense and are not added to its cost basis. However, if you purchase immature livestock for draft, dairy, or breeding purposes, you can depreciate your initial cost once they reach maturity for draft, dairy, or breeding purposes.  Therefore, if you purchase an elk heifer calf in the year she is born, you would not be able to depreciate her until the following year when she is bred.

                3.  Irrigation systems and water wells can be depreciated if they are composed of masonry, concrete, tile, metal, or wood. In addition, you can depreciate costs for moving dirt to make irrigation systems and water wells composed of these materials.

                4. Agricultural structures and farm buildings (including fences!!) can be depreciated.

                5.  Farm machinery and equipment can be depreciated.

                6.  Grain bins can be depreciated.

                7.  The “normal” business assets, such as those you depreciate in your other businesses, can be depreciated.

 

What cannot be depreciated?

                1.  Property placed in service and disposed of in the same year

                2.  Land

                3.  Inventory (assets held for resale)

                4.  Leased property

                5.  Trademark and trade name

 

When does depreciation begin and end?

                1.  You begin to depreciate your property when you place it in service for use in your business. You place property in service when it is ready and available for a specific use.  For example, you bought a planter for your farm business late in the year after harvest was over. You take a depreciation deduction for the planter beginning in the year of purchase because it was ready and available for its specific use even though you did not actually use it until the following year.

                2.  You retire property from service when you permanently withdraw it from use in a business. You can retire property from service by selling, exchanging, abandoning, or destroying it (which includes death of livestock).

 

How do I claim the depreciation deduction for my farm assets?

                Use Form 4562 to claim depreciation deductions and to elect the Section 179 deduction (which follows later).

 

The following is a sample table of depreciation lives for farm assets:

                                                                                      General Depreciable Systems Life (years)

Farm buildings                                                                                      20

Farm machinery and equipment                                                         7

Fences (agricultural)                                                                            7

Cattle, bison, elk, etc. (breeding)                                                       5

Grain bin                                                                                                7

Water wells                                                                                           15

 

What are some of the different methods of depreciation?

                1.  The 150% declining balance method over the General Depreciable Systems Life recovery period, switching to the straight line method when that method provides a greater deduction

                2.  The straight line method over the GDS recovery period

 

Can I use the 200% declining balance depreciation method that I use in my business?

                No, farm and ranch depreciable assets must use the 150% method or straight line method.

 

Could you give an example of the percentages for depreciation for each year for my elk using 150% declining balance method.

                Year                                        % Depreciation    

1                                                              15%

                2                                                              25.50%

3                                                              17.85%

4                                                              16.66%

5                                                              16.66%

6                                                              8.33%

 

What ranch property qualifies for Section 179 deduction?

                1.  Machinery and equipment

                2.  Agricultural fences

3.  Livestock (Elk are classified as livestock, per the USDA.)

 

What is the Section 179 deduction?

                For tax year 2000 you may elect to expense up to $20,000 of qualifying property in the year it was purchased rather than to depreciate that portion of the property. In 2001 the amount increases to $24,000.

 

The above questions were answered by referencing the IRS publication 225, “Farmer’s Tax Guide.” This guide is available on the Internet at http://www.irs.ustreas.gov. I highly recommend that you make sure that your tax preparer is familiar with this publication because there are many differences between “normal businesses” and the elk-raising business!

 

Sue Whittlesey retired from her CPA practice almost six years ago to become a full-time elk and bison rancher. You can find more of Sue's tax tips at The High Wire Ranch Website. You can forward specific questions to her at highwireranch@hotmail.com.