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Depreciation and Section 179

 

TABLE OF CONTENTS

Page 1

  1. Sources of Tax Information 1
  2. Depreciation overview 2-4
  3. Section 179 5-7
  4. Loss limitations 8
  5. Record Keeping Tips 9-10
I. SOURCES OF TAX INFORMATION
    1. IRS Publication 225 – Farmer’s Tax Guide
    2. IRS Publication 583 – Starting a Business & Keeping Records
    3. IRS Publication 51 – (Circular A), Agricultural Employer’s Tax Guide
    4. IRS Publication 463 – Travel, Entertainment, Gift and Car Expenses
    5. IRS Forms & Instructions:
      1. Schedule F
      2. Form 4562
      3. W-2’s & W-3
      4. 1099MISC
    6. Alpaca websites
    7. Tax professional

 

Page 1

II. DEPRECIATION OVERVIEW

A. What property can be depreciated?

1. Most types of tangible property except land

    1. Examples include: buildings, machinery, equipment,
    2. vehicles, certain livestock and furniture

    3. Certain intangible property such as computer software
    4. Must meet the following requirements:
          1. it must be property you own
          2. it must be used in your business (may be partial business use, e.g., cars)
          3. it must have a determinable useful life
          4. it must be expected to last more than 1 year
    5. Inventory cannot be depreciated because it is not held for
    6. use in your business (it is held for sale)

    7. 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?

    1. 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

    1. Immature livestock – depreciation begins when the livestock
    2. 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/

    3. Cost or other basis fully recovered – you stop depreciating
    4. 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.

    5. Retired from service – you stop depreciating property when
    6. 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:

          1. You sell or exchange the property
          2. You convert the property to personal use
          3. You abandon the property
          4. The property is destroyed

 

Page 3

II. DEPRECIATION OVERVIEW (continued)

C. Modified Accelerated Cost Recovery System (MACRS)

1. Figuring depreciation under MACRS

    1. Property’s recovery class
    2. Placed-in service date
    3. Basis for depreciation
    4. Recovery period
    5. Convention
    6. Depreciation method

 

 

Page 4

III. Section 179 Deduction

A. Eligible property

    1. Tangible personal property
            1. machinery and equipment
            2. Property contained in or attached to a building (other than structural components) such as automatic feeders, barn cleaners, and office equipment
            3. Livestock, including horses, cattle, hogs, sheep, goats, mink and other fur-bearing animals
          1. 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.
          2. Single-purpose agricultural (livestock) structures – includes any building or enclosure specifically designed, constructed, and used for both of the following reasons:
            1. To house, raise, and feed a particular type of livestock and its produce
            2. 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.

          3. 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.

    2. Specifically excepted property including air conditioning and heating units.
    3. C. How much can you deduct?

          1. Based on the cost or other basis of the qualifying property
          2. Dollar limit – 2005 $105,000 2006 $108,000
            1. 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.
            2. Limits for SUV’s – the total amount you can elect for certain SUV’s in 2005 is $25,000.
            3. 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

             

            Page 6

            III. Section 179 Deduction (continued)

             

          3. 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.
          4. 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:

            1. Section 1231 gains (or losses)
            2. Wages, salaries, tips or other pay you earned as an employee
          5. 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

 

    1. Passive activity loss limitations
    2. Seven tests for material participation

      1. 500 hour test
      2. 100 hour test
      3. Substantially all test
      4. Significant participation activities
      5. Five out of ten year test
      6. 3 year test for a personal service activity
      7. Facts and circumstances test

       

    3. Hobby loss rules
    4.  

    5. At-risk limitations

 

Page 8

V. RECORD KEEPING TIPS

 

    1. Separate checking account
    1. account for all checking account activity
    2. reconcile bank account monthly
    1. Separate VISA
    2. Petty cash
    1. get receipts – $75 rule
    • documents your location
    1. notations - who
    • what
    • where
    • when
    • why – business purpose/relationship

 

Page 9

V. RECORD KEEPING TIPS (continued)

    1. Vehicle records
    1. 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
    1. 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)

    1. Travel
    1. majority of days on business = full deduction for all travel
    2. minority of days on business = only directly related costs
    1. Ordinary & necessary standard

 

 

 


                                                               








                                                
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         Don & Carolyn Marquette                          Don Cell # 330-618-9768
         2251 Sesame St                                  Carolyn Cell # 330-618-9769
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