PERESENTED BY XMBA 14

Definition The allowance for wear and tear on equipment

and machinery Amount of decreasing value in a capital asset

allowed to be deducted from a business tax return Cost Recovery

You can depreciate property only if it meets the following requirements: It is used in business or held for the production of

income. It must be expected to last for more than one year. In

other words, it must have a useful life that extends substantially beyond the year it was placed in service.

It is property that wears out, decays, gets used up, becomes obsolete, or looses value from natural causes.

Depreciable property can be either tangible or intangible

Purchased property you can see or touch Livestock (purchased) Machinery Buildings and improvements, fences Dams, ponds, or terraces Irrigation systems and water wells Partial business use

You can claim depreciation on the part of a vehicle used in the business (ex - 1/2 business value of a truck)

Purchased property that has value that you cannot readily see or touch Computer Software Copyrights, Patents & Trademarks. Goodwill

Property placed into service and disposed of in the same year.

Land (land can never be depreciated) Inventory

You cannot depreciate property held for resale in the normal course of business

Leased property The value of the lease is already showing up as a

rental expense Raised Market Livestock (Because there is no

cost to recover)

A total of $24,000 may be taken in a section 179 deduction. Once taken, the amount can no longer be

depreciated. You can however, depreciate out the

balance if the asset is over $24,000. Starting in 2003 the amount will be

$25,000

Begins When you “place the

property in service”. When it is ready and

available for a specific use in the business

Example When it was bought for

the business

Ends When the cost of the item

has been recovered or when it is retired from service, whichever happens first

Example When it is sold or is not

longer useable

150% Declining Balance - Only Option

GDS - General Depreciation System

Straight Line Either Option

GDS - General Depreciation System

ADS - Alternative Depreciation System

Longer time for depreciation

ACRS (Acellerated Cost Recovery System) Used on Property Placed

in Service before 1987 Cannot be used on

property placed in service after 1987 (you must use MACRS)

Straight Line Standard method of

depreciation with a similar amount taken out each year

Does not have the advantage of a half year convention which means you must wait to start later

Consult the Farmer’s Tax Guide (Publication 225) to find out the specific lengths of time for depreciation Cattle (Breeding) >> 5 yrs GDS, 7 yrs ADS Hogs (Breeding) >> 3 yrs GDS, 3 yrs ADS Fences >> 7 yrs GDS, 10 yrs ADS Single use farm buildings >> 10 yrs GDS, 15 yrs

ADS Grain Bins >> 7 yrs GDS, 10 yrs ADS

150% Declining Balance (DB) Year 1 - 15.00% Year 2 - 25.50 % Year 3 - 17.85 % Year 4 - 16.66 % Year 5 - 16.66 % Year 6 - 6.33 %

Straight Line - Half Year Year 1 - 10 % Year 2 - 20 % Year 3 - 20 % Year 4 - 20 % Year 5 - 20 % Year 6 - 10 %

More Depreciation Claimed early in the live of the asset Year 1 would be 15 % versus 10 %SL Year 2 would be 25.5 % versus 20 % SL

***Good if you know you will have too much income (problems) immediately in the next couple of years

More depreciation expense is claimed per year later in the life of the asset

*Good if you do not predict to have income problems (need the depreciation) in the next couple of years, but want to be safe in the future

Allows for the depreciation to be spread out over a longer number of years.

Could be an advantage for emergency purchases, i.e. - those not made for a direct impact on income taxes (save it for later when you might need it!)

Depreciation allows “cost recovery” on capital asset purchases in the farm business

Depreciation is a non-cash expense on your schedule F (farm profit or loss statement)

Record Depreciation on Tax Form 4562 Section 179 Deduction ($25,000 for 2003) - Allows a

1 time deduction to help on major farm purchases Two main methods - MACRS and Straight Line Know the rules - they are always changing, stay on

top of them so you can maximize your after-tax income.