The Tax Court issued a ruling on Dec. 5 regarding a part-time farmer near Creston, Iowa. The farmer worked full-time as an UPS driver and farmed about 500 acres in the off hours. He experienced a heart attack in 2011 that perhaps led to the IRS issue. Instead of buying new tractors, the farmer elected to purchase 40- to 50-year-old tractors and place them with implements attached at each of his five farms.
This allowed the farmer to eliminate the time and effort of moving tractors from field-to-field and maintenance could be done by the farmer directly. The farmer had elected to deduct 100% of the cost of these tractors each year of purchase by using Section 179.
Section 179 requires the taxpayer to list each item, which is likely what caused the audit since the IRS assumed the farmer collected farm tractors, especially when the farmer purchased eight tractors in 2013, 12 in 2014 and nine in 2015. By listing each of these tractors on the depreciation Form 4562, the IRS had a road map to follow. Without this listing, it is likely the tax return would not have been audited.
The IRS argued the farmer’s tractor purchases was for personal use and thus no depreciation or other costs related to the tractors were allowed. The farmer was able to argue all of these tractors were used in the farm operation and thus all of the expenses were allowed, including the Section 179 expensing. Certain adjustments were allowed by the IRS related to inaccurate records, etc.
The farmer was not completely clear of owing taxes on the audit. As usual, many personal expenses were commingled with farm expenses and the Tax Court allowed the IRS to win on these items. Also, the return included errors related to certain assets that had been expensed under Section 179 and then erroneously deprecated during the years at question.
This is not a ground-breaking case, but it does show farmers are allowed great discretion in how they want to farm. However, it also shows farmers need to maintain good records and not commingle personal and business expenses without appropriate records.
More on taxes:
Prepaid Farm Expenses Reminder
4 Year-End Tax Tips for Farmers from Paul Neiffer
Paul Neiffer: Let’s Talk Depreciation for Farmers
