How to maximize tax advantage on tractor purchase?

kybota · Sep 3, 2004

( I am constantly amazed at how many people think you just raise a few crops and graze a few cows and you are an ag exempt business able to write off tens of thousands of dollars against a few hundred or a few thousand dollars in income. )

That is basically what the tractor dealer who first brought this to my attention was suggesting that you could do. Even so far as how the 2-3 acres of nearly mature walnut trees could be used for this purpose.

Maybe he's been sniffing too many diesel fumes. But, supposedly, and I've heard this several places, in order to "preserve" family farming and rural areas in general, the criteria for a income generating farm is pushed ever lower for tax purposes, federal, state and local. That's the rationale I've heard, anyway.

OrangeGuy · Sep 3, 2004

You certainly could depreciate a new tractor against your earnings from 2-3 acres of walnut trees. It just depends on how much income these trees will generate. If you purchase a $25,000 tractor and hope to write off $12,500 (50%) in year one, you would need a net taxable income for that year of at least $12,500. If 2-3 acres of walnut trees can generate this much net income then the dealer was correct for this example.

Too many "gentlemen farmers" believe they can buy a few acres, establish an agricultural enterprise, buy some machinery, and then reduce their income tax liability on their corporate salary by depreciating the machinery. Great thought but that tax loophole was closed many years ago.

If you want to depreciate farm equipment, you have to have farm income.

OrangeGuy

KiotiJohn · Sep 3, 2004

When I used to have rental property I could take losses against all of my regular income as well, but that all changed some time ago and I got out of rentals. Since I could only write off against rental income, it wasn't worth the hassles for me. I believe this is the same case with a farm enterprise. If it could be written off all your income, it would be great, but I don't believe it can be any longer. John

denali · Sep 4, 2004

I am not an accountant but I believe there are a number of things that need to be taken into consideration when one tries to determine the tax implications of the start-up costs of a farming enterprise.

There are clearly cases where losses from a business can be deducted from non-business related income. IRS publication 536 discusses Net Operating Losses. It contains a example tax return that shows how a business related loss can be deducted from non-business income. The example does not cover depreciation, this it may not be applicable in the case of farm equipment. However, it does make the point that losses are not always limted to business related income.

I completely agree that no one should expect to get write-offs for a hobby. If you have a legitimate farming enterprise (not a bogus tax dodge) there are deductions you are allowed. Again, if someone is serious about this, get an accountant. A wrong step could cost you dearly, back taxes and penalties.

cowboydoc · Sep 5, 2004

you would need a net taxable income for that year of at least $12,500. 

This is only true if you are considered a hobby business. If you are considered a legitimate business you can most certaily take losses against your second business. You have to have a good business plan and if you are not financially in the green you need to redo your plan. As long as your plan is reasonable and you can show how you intend to be profitable you can take the losses against regular income.