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Depreciation and Section 179
TABLE OF CONTENTS
Page 1
- Sources of Tax Information 1
- Depreciation overview 2-4
- Section 179 5-7
- Loss limitations 8
- Record Keeping Tips 9-10
I. SOURCES OF TAX INFORMATION
IRS Publication 225 – Farmer’s Tax Guide
IRS Publication 583 – Starting a Business & Keeping Records
IRS Publication 51 – (Circular A), Agricultural Employer’s Tax Guide
IRS Publication 463 – Travel, Entertainment, Gift and Car Expenses
IRS Forms & Instructions:
- Schedule F
- Form 4562
- W-2’s & W-3
- 1099MISC
Alpaca websites
Tax professional
Page 1
II. DEPRECIATION OVERVIEW
A. What property can be depreciated?
1. Most types of tangible property except land
- Examples include: buildings, machinery, equipment,
vehicles, certain livestock and furniture
- Certain intangible property such as computer software
- Must meet the following requirements:
- it must be property you own
- it must be used in your business (may be partial business use, e.g., cars)
- it must have a determinable useful life
- it must be expected to last more than 1 year
- Inventory cannot be depreciated because it is not held for
use in your business (it is held for sale)
- Livestock purchased for draft, breeding, or dairy purposes
can be depreciated only if they are not kept in an inventory account
Page 2
II. DEPRECIATION OVERVIEW (continued)
B. When does depreciation begin and end?
- You begin to depreciate property when you place it in
service for use in your business
2. Property is placed in service when it is ready and available for a specific use
- Immature livestock – depreciation begins when the livestock
reaches the age of maturity. If you acquire immature livestock for draft, dairy, or breeding purposes, your depreciation begins when the livestock reach the age when they can be worked, milked, or bred. When this occurs, your basis for depreciation is your original cost for the immature livestock. With Alpacas, the cria fleece is a valuable commodity and therefore most breeders start depreciation at very early age/
- Cost or other basis fully recovered – you stop depreciating
property when you have fully recovered your cost of other basis. This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or other basis in the property.
- Retired from service – you stop depreciating property when
you retire it from service, even if you have not fully recovered its cost or other basis. You retire property from service when you permanently withdraw if from productive use in business because of any of the following events:
- You sell or exchange the property
- You convert the property to personal use
- You abandon the property
- The property is destroyed
Page 3
II. DEPRECIATION OVERVIEW (continued)
C. Modified Accelerated Cost Recovery System (MACRS)
1. Figuring depreciation under MACRS
- Property’s recovery class
- Placed-in service date
- Basis for depreciation
- Recovery period
- Convention
- Depreciation method
Page 4
III. Section 179 Deduction
A. Eligible property
- Tangible personal property
- machinery and equipment
- Property contained in or attached to a building (other than structural components) such as automatic feeders, barn cleaners, and office equipment
- Livestock, including horses, cattle, hogs, sheep, goats, mink and other fur-bearing animals
- Facility used for the bulk storage of fungible commodities – a grain bin is an example of a storage facility that is qualifying section 179 property. It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities.
- Single-purpose agricultural (livestock) structures – includes any building or enclosure specifically designed, constructed, and used for both of the following reasons:
- To house, raise, and feed a particular type of livestock and its produce
- To house the equipment, including any replacements, needed to house, raise, or feed the livestock.
The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. It must be used only for the purpose that qualified it.
- Off-the-shelf computer software
Page 5
III. Section 179 Deduction (continued)
B. What property does not qualify?
1. Land and improvements – including nonagricultural fences, paved parking areas, bridges. BUT, agricultural fences and field drainage tiles DO qualify as section 179 property.
- Specifically excepted property including air conditioning and heating units.
C. How much can you deduct?
- Based on the cost or other basis of the qualifying property
- Dollar limit – 2005 $105,000 2006 $108,000
- If the cost of qualifying section 179 property placed in service in 2006 is over $430,000, you must reduce the dollar limit (but not below zero) by the amount of cost over $430,000.
- Limits for SUV’s – the total amount you can elect for certain SUV’s in 2005 is $25,000.
- Limits for passenger automobiles – the annual amount you can depreciate is limited as follows:
1st year $2,960
2nd year 4,700
3rd year 2,850
4th & later years 1,675
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III. Section 179 Deduction (continued)
- Business income limit – total cost that you can deduct each year is limited to the taxable income from the active conduct of any trade or business during the year. Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business.
Figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. In addition to your farm income or loss include the following:
- Section 1231 gains (or losses)
- Wages, salaries, tips or other pay you earned as an employee
- Carryover of disallowed deduction – unlimited number of years.
5. How do you elect the section 179 deduction?
a. Form 4562, Part 1
b. Original or timely filed amended return
c. Election can be revoked without IRS
approval by filing an amended return
Page 7
IV. LOSS LIMITATIONS
- Passive activity loss limitations
Seven tests for material participation
- 500 hour test
- 100 hour test
- Substantially all test
- Significant participation activities
- Five out of ten year test
- 3 year test for a personal service activity
- Facts and circumstances test
- Hobby loss rules
- At-risk limitations
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V. RECORD KEEPING TIPS
- Separate checking account
- account for all checking account activity
- reconcile bank account monthly
- Separate VISA
- Petty cash
- get receipts – $75 rule
- notations - who
- what
- where
- when
- why – business purpose/relationship
Page 9
V. RECORD KEEPING TIPS (continued)
- Vehicle records
- mileage log – contemporaneous
- tax return questions – total miles
- business miles
- commuting miles
- Do you have records?
- Are they written?
- beginning and end of year odometer reading
- standard mileage rate
- limits on use
- no prior sec. 179 or MACRS
- for 2005 1/1-8/31 40.5 cents per mile
9/1-12/31 48.5 cents per mile
- for 2006 44.5 cents per mile
- add parking & tolls
- add interest on car loan (self-employed only)
- Travel
- majority of days on business = full deduction for all travel
- minority of days on business = only directly related costs
- Ordinary & necessary standard
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