When managing your farming business, it's crucial to track farm assets like buildings, machinery, equipment, and other property. These assets, whether they are farm machinery or real property like farm buildings, have a useful life—the period during which they can be expected to be productive.
In FarmRaise Tracks, we help you track these farm assets, and if you choose to depreciate them, we use the Straight Line Depreciation Method. This means the depreciation amount is spread evenly across the asset's useful life, rather than being front-loaded as it would be with other methods, like the declining balance method.
Depreciation and Schedule F: Key Things to Know
It's important to note that while FarmRaise Tracks helps you track farm assets and straight-line depreciation, the generated Schedule F form does not automatically include depreciation on Line 14. This means you will need to work with your accountant or tax preparer to calculate your depreciation deduction for the year, especially if you’re using other methods like MACRS (Modified Accelerated Cost Recovery System) or opting for bonus depreciation. The IRS provides specific guidelines on this through Publication 225, which covers the details of farm income and depreciation of farm property.
What is the Useful Life of an Asset?
The useful life of an asset is the period over which it is expected to be productive for your farming business. This period is usually determined by the IRS based on the type of asset. For example:
Farm machinery and equipment generally have a class life of 7 years under the General Depreciation System (GDS).
Farm buildings like grain bins or horticultural structures often have longer recovery periods, such as 10 or 20 years.
Some assets, like single-purpose farm structures, might qualify for Section 179 deductions, allowing you to expense the entire cost in the year you purchased the item.
Depreciation Methods and Recovery Periods
While FarmRaise Tracks uses the Straight Line Method, the IRS allows other depreciation methods for farm property, such as:
MACRS, which provides faster depreciation with a shorter recovery period.
Declining Balance Method, which front-loads the depreciation deduction.
If you're interested in an alternative approach, the Alternative Depreciation System (ADS) may also apply to certain assets, offering a longer recovery period but typically a smaller annual deduction.
Depreciation, Balance Sheets, and Taxable Income
Depreciation directly affects your balance sheet and taxable income. While it reduces your taxable income through the depreciation deduction, it’s important to maintain enough liquidity to cover ongoing expenses, like leases, loan payments to lenders, and other liabilities. The timing of your deductions and the method of depreciation used will impact your cash flow, especially if you're managing significant assets like rental property, farm equipment, or real estate.
Consult with Your Accountant or Tax Preparer
Although FarmRaise Tracks helps you track your assets, it’s important to consult your tax professional to ensure all farm-related purchases and depreciation deductions are accounted for correctly. They can also advise on if it's advantageous to use bonus depreciation, Section 179, or other methods based on your specific farming or ranching situation.
Important Takeaways for Farmers and Ranchers
Depreciation is critical for reducing your farm income and managing the cost of your farm assets over time.
FarmRaise Tracks uses the straight-line depreciation Method, but other methods like MACRS or the Declining Balance Method may also apply to your situation.
Work with a tax expert to ensure your balance sheet is accurate and all depreciation deductions, including those not reflected in FarmRaise’s Schedule F, are correctly reported to the IRS.
The useful life of your assets—whether they are farm machinery, grain bins, or horticultural structures—will affect how and when you can take depreciation deductions.
For more information, be sure to check IRS Publication 225 and talk to your lenders and accountant to optimize the financial health of your farming business.