The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
How Fast Can I Depreciate an Irrigation System
Sep 03, 2010
We had a reader give us the following question yesterday:
Last year , 2009 , I purchased 2 new irrigation systems in Nov. and they were delivered in Dec. The total price was $93,800. When I did my tax the CPA said I had to dep. them for 15 yrs. I will be 75 and am retired - making me 90? before they are dep. out . I`d like to take them for 9 yrs. but he says it can`t be changed . What do you think ? They used to do DDB . Is that possible ? With the way things are going with the Govt. I`d like to pay the least tax possible.
This question actually has several answers that are as follows:
- We are uncertain as to whether the irrigation system is primarily above ground such as a circle or wheel lines or below ground for mainline. When I see "purchased 2 new irrigation systems", I would assume above ground which for 2009 which would have been treated as farm personal property depreciated over 5 years, not 15 years. However, if the irrigation systems were mostly in the ground, then 15 years is correct.
- Normally, you can not elect to depreciate an asset over 9 years. The Code does allow you to elect a longer period, but these years are locked in by the code and you can not pick and choose the years you want.
- The reader was asking if "DDB" was available. This refers to "double declining balance" and it is a depreciation method that allows the farmer to take twice the deduction in the first year than using the straight-line method. Now each year thereafter, the deduction will "decline" until straight-line is larger. This method does result in extra depreciation over the life of the asset, just more in the first few years. Several years back, farmers were only allowed to use 150% declining balance instead of 200% (or double) declining balance.
- Another item that is unknown from the question is whether Section 179 expense deduction could have been used to totally deduct the irrigation systems. For 2009, you could deduct up to $250,000 under this option, but there are certain situations that might have reduced or eliminated this option for this farmer. This would be especially true if the farmer was not actively farming and land and just renting the land out or if the overall farm income was too little.
- Last, if the irrigation systems were brand new, then the purchase would have qualified for the 50% immediate deduction with the remainder depreciated over either 5 or 15 years.
If the assets were in fact depreciated incorrectly, a farmer has three years to file an amended tax return and correct the method and receive a refund. For 2009 tax returns, you would normally have until either April 15, 2013 or October 15, 2013 if you filed an extension.