Equipment depreciation guidelines.

[unaka]

I took advantage of this section 179 this year. In 2001 I purchased a MF 263 2wd and several implements. My wife uses Turbo Tax and told me about this new section 179. We researched it and everything we could find said we should take advantage of it. With the price of the tractor and implements, we were able to take the whole $24k loss, resulting in a nice refund. I took that refund, went back to the dealer, and upgraded to a MF 4wd 243. It was delivered yesterday (pictures will be forthcoming). According to a CPA I talked with, we might be triggered for an audit for taking such a loss, but we keep good records and his advice was to stand our ground.

Unaka

 

[TerryinMD]

unaka,

Cool... I like it.

Now, when you talk about keeping good records. What does that mean? A spreadsheet showing the date of purchase and what you spent. Or are they detailed as to what, where, and when you used the equipment?

That is another detail I failed to mention on my original post. To what length does one need to go to keepeth the taxman away....

Terry

 

[MikePA]

To depreciate an asset, don't you have to be a business? I recall reading that if your business doesn't show a profit in x number of years, it's considered a hobby?

 

[cowboydoc]

Mike and Terry,
Yes you do have to have a legitimate business to take deductions. As far as records go you need to have a detailed business plan that says exactly what you are going to do to make a profit. Then you need to have a marketing plan, etc. That's where all the paperwork comes in. Then you have to actually have some business! We talked about this awhile ago on here and for the most part unless you are seriously doing this as a business you're better off to do things under the table.

 

[MikePA]

doc,

That's what I thought. I had this vision (nightmare) of people taking deductions then being declared a hobby and having to pay them back. Not a pretty sight. /w3tcompact/icons/sad.gif

 

[unaka]

Terry,

I'll preface my comments by saying I'm no tax expert, but I (me and my wife) have always done my own taxes and have learned a few things along the way.

When the IRS is examining a significant business loss (like the one I just took), and they mark someone for an audit, they will be looking to see if you really run a "business" or simply have an expensive "hobby". I keep records of every ( I mean EVERY ) expenditure I make that has anything to do with my cattle. This is everything from feed to fencing materials. I have a notebook where I write mileage to and from the feedstore. I keep records of each cow, her offspring, birthweight, and notes on birthing ease, or difficulty, and so on. I could go on, but my point is that if you're deducting expenses for a business, you'd better be keeping good records and "acting" like a business, otherwise the IRS will deem your "business" as nothing more than a glorified hobby.

Unaka

 

[TerryinMD]

Now this is getting more interesting....

We do not have a formal business plan but have been reporting income from our market garden for a few years. My wife has a EIC. We bought the tractor and equipment this past year to increase our productivity and maintain the property for the market garden. We keep records of all expenditures for the business. So, I guess we're doing what we need to do.

So I guess step one is to define a business plan. Step two has been in effect for a while (selling goods and making money).

Hmmm.... need to do a little more research. /w3tcompact/icons/eyes.gif

Terry

 

[cowboydoc]

Terry,
If you get audited you will stand a significantly better chance of winning if you have a business plan. When deciding on business or hobby they go by amt. of hours worked on the business per week, etc. Also like was said if you're declaing losses year after year you better have a business plan in effect on how you are going to become profitable in the future. Unaka is doing it right. He keeps track of all expenses and details of his business. I would assume he probably culls out bad cows and experiments with different ones for birthweights and selling weights. This is what they want to see. That you are actively trying to make a go of the business and become profitable. Without a business plan in writing you are going to have a tough time proving to the IRS why you took all those deductions.

For example this last year I reached a pretty high profit, esp. with the cattle. That's why I invested in new hay equipment and land. I wrote up a business plan on how I could raise profitability even more by raising more of my own hay and increasing my herd and less dependence on outside sources for feed. Then on the horse end I wrote in my plan that the profitability of rope horses was on the decline and the profitablility of reining horses was on the upward trend. I used several research articles to back this up and referenced them in my plan. With this in mind I sold four of my roping bred broodmares and bought the new stud and some new reining bred broodmares. Now I am back to operating at a loss again but with a plan to become even more profitable at the end of the next four years. Now if I ever get audited I've got a sound plan for why I invested the way that I did and switched directions from my previous business plan.

 

[TerryinMD]

This makes sense.... now I understand the why's of the business plan. I mistakenly thought that they were for startup businesses to present to financiers to acquire funding. Ahhhh... it's a gubmint thing... /w3tcompact/icons/eyes.gif

Again, thanks for the info....

Terry

 

[Anonymous Poster]

<font color=blue>...if your business doesn't show a profit in x number of years, it's considered a hobby? ...</font color=blue>

So... Thats it!... I've been doing a hobby all these years....? /w3tcompact/icons/wink.gif