Equipment depreciation guidelines.

[heehaw]

i have seen folks have to fight to prove what they were doing was a business, and not a hobby, but they were raising and showing minature donkeys. i doubt anyone would have to fight to prove cattle as NOT a hobby; surely no one would have a hobby that is so contankourous. I only keep 6-8 cows, but i keep up with all the expense and do a IRS form F for the farm. if i hadn't lost 2 calfs last year, i would have made money..not much, but some. what i can't figure out is why folks don't use the one year deduction? maybe if your income was going to be higher every year, the deduction would buy you more by putting it off via depreciation??
heehaw

 

[unaka]

Heehaw

That also happened to me. I think I remember posting the fact that I lost 3 calves and a proven cow last year. I raise an Angus-Hereford mix and I decided to try a Charolais bull because I had read that the offspring would have good hybrid vigor. The ones that made it are proving to be excellent weight gainers, but in the end, it was too much of a price to pay. The trauma and the heartache of watching an animal suffer like that, and burying calf after calf almost broke me and my wife from the cattle business.

Cowboy Doc, I appreciate your comments. While I keep records and notes on my cattle as diligently as I can, I've never really put a true business plan on paper. I started a rough draft of one last night, simply putting down my logic as to how I plan to make money. It was a good exercise. I've always had a rough plan in my mind, but it's not until you put something down on paper that you see different angles and ideas that you hadn't seen before.

Unaka

 

[cowboydoc]

Unaka,
If you have a fax # email it to me and I will fax you an excellent outline for a business plan for a ranch or farm operation.

 

[TerryinMD]

CBD,

Hey, can I jump in on this. I think I need to develop one also. Mentioned it to the CFO last night and she thinks that it's time to do things right. Been doing that tax wise for a few years, but now the parameters have changed and we have to protect our hinies....

Terry

 

[cowboydoc]

Sure just send me a fax # Terry. I'd post it here but have to be careful about posting copyrighted stuff. I'll bring it in tomorrow and anyone that wants it just email me your fax # at mesasage@machlink.com

 

[TerryinMD]

Excellent!!

You da man!! /w3tcompact/icons/smile.gif

Terry

 

[woodmills1]

the accelerated depreciation over the first year is called 179 expense. it allows, i believe up to 20,000 of equipment purchase to be written off in the first year of purchase. i believe if you get form 4562 and instructions you will see this and other depreciation schedules. the 179 benifits are huge as you can shelter income in the year of the purchase. if you buy 20,000 dollars worth of equipment and are in the 28 per cent bracket you save 5,600 dollars of tax payments in the first year. it is a very good rule for those starting or upgrading a business. by the way since it reduces income it also reduces social security payments whic for self employed persons is i think 14.5 percent. and yes you are supposed to show a profit in 3 of the last five years, but using 179 to create a loss shouldnt trigger a problem due to the level of investment. one draw back to 179 occurs if you sell the equipment before its regular depreciation period, you are supposed to recapture the unearned depreciation. in effect paying back the credit you didn't earn.

 

[unaka]

Woodmills,

You said, "one draw back to 179 occurs if you sell the equipment before its regular depreciation period, you are supposed to recapture the unearned depreciation. in effect paying back the credit you didn't earn."

I've been wondering how I would treat this for my 2002 taxes. I didn't really sell the tractor, but traded up. I remember reading something about a like kind purchase. You sound like you know tax stuff pretty well. Do you know if I'll be penalized next year for upgrading?

Unaka

 

[TerryinMD]

I was wondering the same thing. How does this effect trading in on newer equipment? Or selling off equipment to upgrade to newer equipment to increase productivity?

Terry

 

[cowboydoc]

There is a place for you to report it on subsequent returns. If you bought it in the business then you have to report it if you sell.