With better commodity prices, many farmers will be building new shops, barns, and other farm buildings. We got the following question from a reader regarding how can they deduct the cost of these farm buildings:
I understand that a building would go on a depreciation schedule but have read on the internet (dangerous I know) about deducting parts of it off as repairs and maintenance to get a more immediate benefit. Ultimately I’d like to build it over the course of 2 or 3 years. I’m a younger guy so I have time to depreciate it out, but also like the idea of writing more of it off sooner. Anyways thanks for any insight.
There is an income tax provision that allows you to deduct certain de minimis costs as they are incurred. As long as these costs are less than $2,500 on an individual unit basis, a farmer can elect to deduct these as incurred. You are also required to deduct these on your books and records including any type of fair market value statement you provide to a bank, etc.
However, when you construct an asset, this provision does not apply. In this case, the farmer is required to accumulate all of the costs related to constructing the building and once the building is ready for use, it is considered to be a farm building which can be depreciated over 20 years. Now, 20 years is a long-time, however, this asset is also available for 100% bonus depreciation which means you can deduct the full cost of the building in 2022 for federal income tax purposes. Some states do not allow you this full deduction.
Ready for use for a building may be available before you get an occupancy permit but be forewarned any IRS auditor will typically review that permit.
Starting in 2023, 100% bonus depreciation will drop to 80% and then 60% in 2024, etc. Certain longer term assets (that typically do not apply to farm buildings) would have an extra year.
The bottom line is if you are constructing a farm building no deduction until it is fully constructed and then you can take 100% bonus depreciation or elect to depreciate over 20 years (which is actually 21 years).
