Deduct implements on taxes if you Farm or Use in Business?

[sweettractors]

What is the Tax code criteria for deducting or depreciating tractors and implements if you use them in your full or part time business or farm operation? Ken Sweet

 

[smstonypoint]

Ken,

The IRS publishes Publication 225 (2010), Farmer's Tax Guide.

Chapter 7 will tell you everything you want to know (and then some). I think the whole publication is worth the read, even for those who don't do their own tax preparation.

Steve

 

[sweettractors]

Ken,

The IRS publishes Publication 225 (2010), Farmer's Tax Guide.

Chapter 7 will tell you everything you want to know (and then some). I think the whole publication is worth the read, even for those who don't do their own tax preparation.

Steve

I had a customer that owned and farmed a 300+ acre farm and had bought tractors and implements for years to run the farm and he and his accountant did not ever take any deductions or section 179's for anything. He was in his 70's when he found out he needed to communicate better with the person doing his taxes. Ken Sweet

 

[beppington]

Ugh.

 

[smstonypoint]

He needed to fire that accountant.

Steve

 

[smstonypoint]

He needed to fire that accountant.

Steve

Upon reflection, maybe the accountant was taking into account earnings for Social Security purposes -- higher taxes paid while working (self-employment income and FICA) and higher SS payments after retirement.


Just a thought.

Steve

 

[SandburRanch]

What is the Tax code criteria for deducting or depreciating tractors and implements if you use them in your full or part time business or farm operation? Ken Sweet

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Our tax system is such a joke with all the - and if - but if - sometimes if - crap that I guarantee if you ask that question to 10 cpa-s don't be surprised if you get 10 different answers.

 

[sweettractors]

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Our tax system is such a joke with all the - and if - but if - sometimes if - crap that I guarantee if you ask that question to 10 cpa-s don't be surprised if you get 10 different answers.

I had a tax lawyer tell me that if you used a implement or tractor in a situation where you file a schedule F or you have a part time custom Brush Hogging service,Snowblowing service or Custom tractor work of any kind and file a schedule C that these items could be fully depreciated or at least partially depreciated or prorated depending on the percentage of farm or business operations the tool preformed. Obviously, you could not take them off for use in your own yard or home garden, etc. It would have to be commercial "for profit" type of business to qualify. Is that prettty close to correct? Ken Sweet

 

[smstonypoint]

Is that prettty close to correct? Ken Sweet

Yes.

Steve

 

[Alan L.]

If used at least 50% for business you can write off the business portion of the cost up to $250K (going up to $500K) under section 179 IF the business makes a profit. In fact you can add in all business profits and even salary to get the "profit".

I can't imagine a scenario in which paying more income and SE tax to get more SS benefits makes sense unless maybe only a year of credits was needed to qualify.

 

[smstonypoint]

I can't imagine a scenario in which paying more income and SE tax to get more SS benefits makes sense unless maybe only a year of credits was needed to qualify.

I can. I have a friend ( a sharp cookie) who draws a Federal pension. He declared his timber sales income as ordinary income although the income qualified as capital gains. By doing so, he paid FICA taxes and earned credits to qualify for SS. He had done the math and concluded that it worked for him.

The situation is further complicated by the fact that farmers can still use income averaging for tax purposes.

IMO, the accountant was either
(a) a genius for taking into account the effects of the farmer's income and FICA taxes on his SS income, or
(b) a complete idiot.

Steve

 

[RoMad]

Many years ago one of my older brothers told me that you have to think about your taxes every day of the year. At the time I thought that was one of the dumbest things I ever heard.
Now, I think about my taxes every day. I bought my tractor for the sole purpose of keeping up my rental property, so I will write it off of my taxes. I will also include the price of all of the fuel, the implements, the mileage for taking it to the dealer etc.
I have what I think is a good tax person, but I will be reading the information listed above just to make sure.
When I bought my Gravely mower a few years ago she said she would write it off for 5 years. My used tractor was only 1k more than my new gravely, so it will probably be the same.
Our tax system is so screwed up I don't think any person that does taxes could ever get it all correct. I would happily vote for a flat tax, but that is a topic for another thread.

 

[RoMad]

Here is what a friend of mine did for his business. He is an avid fisherman. He bought a new boat for around 25k, a new 3/4 ton truck to pull it with, attended a boat captains class, got his captains license (not easy) and started a charter fishing business. He deducted the cost of everything above over 5 years for his business. He barely made any money with his charter business since he is busy working full time at his regular job.
At the end of the 5 years he went out of business.
He still has a nice boat, the truck, and his captains license.
Something to think about if you have an expensive tractor.

 

[smstonypoint]

I bought my tractor for the sole purpose of keeping up my rental property,
<snip>
I have what I think is a good tax person, but I will be reading the information listed above just to make sure.

Keep in mind that there are special provisions in the tax code for farmers (e.g., income averaging) and so some of the information in the Farmer's Tax Guide may not apply to other business types (e.g., real-estate rental).

Steve

 

[weldingisfun]

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Our tax system is such a joke with all the - and if - but if - sometimes if - crap that I guarantee if you ask that question to 10 cpa-s don't be surprised if you get 10 different answers.

Take that a step further. You can ask that question of 10 different IRS Tax Assistance Reps and you will get 10 different answers. No one understands our tax codes. Not even those who write them.

 

[greasemonkeyok]

I disagree. You can ask 10 Accountants and get 14 different answers. (At least 4 of them will give you 2 different answers.)

 

[ustmd]

He needed to fire that accountant.

Steve

I agree--The account needed to explain the options to him.

Managing capital equipment in a business gets complicated.

As someone mentioned previously, the business needs to show a profit for the IRS to consider it legitimate and that is a profit after you take the deduction for the depreciation for the equipment. So if you buy $100K of equipment and depreciate it over 5 years (fairly standard), your business has $20K in paper losses before you do thing 1.

Additionally, if you sell the capital equipment, you are open to possible capital gain taxes. So, for example, if after 5 years and the equipment is fully depreciated, the business owner sells the $100K of equipment for $20K, the IRS considers the $20K as capital gains, because the equipment is fully depreciated and has no basis in value.

In contrast, the owner can take the full value of the equipment in the year he buys it and treat it as business expense (even if he is paying the equipment off over 5 years) and use the expense to offset a large windfall of profits (not likely in farming, but...).

As most things in business, there is no standard answer or necessarily "right" or "wrong" answer. It is all dependant on the circumstances and the individual owner's preferences.