Farmers are known to be frugal. And, it makes sense: every dollar matters on the farmstead. That’s why it’s important to know that the IRS considers field tile a capital expense and a depreciable asset.2 This pertains to the cost of materials, labor costs, and installation. Field tile is categorized as a land preparation cost.
First and foremost, the importance of proper record keeping should be stressed. Record keeping is integral to the successful operation of the farm. Misplaced records could equate to inaccurate reports or lost dollars for possible deductions come tax time. For resources on ways to improve your methods, visit the Farm Financial Standards Council website for more information. https://ffsc.org/index.php/2017/11/08/ffsc-releases-free-implementation-guide/
Obtaining and utilizing a qualified tax accountant is just as important as record keeping and worth mentioning. Tax law can be difficult and confusing to navigate. Mistakes made could also prove costly if the farm is ever audited by the IRS.
Farm Field tile can be depreciated if a determination can be made on its ‘useful life’.
Some property, including field tile, may be eligible for a special depreciation allowance. This allowance may be referred to as ‘additional first-year depreciation’ 1. There are certain factors that will determine the amount of depreciation for a certain year: recovery period of the equipment, when use of the equipment began, and the depreciable basis. 1
How do you establish the depreciable basis?
This typically consists of the cost of the item, sales tax, shipping costs, installation costs, and any other costs incurred directly related to the item. Additionally, you must own the item to claim depreciation.
To properly depreciate field tile, one should use the Modified Accelerated Cost Recovery System (MACRS). Within the MACRS, there are two systems available for use: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). A qualified tax accountant can assist with determining how and when either GDS or ADS is applied to which assets.
If you are an owner that leases the farmland to a tenant, you may not claim depreciation on the field tile if you are not actively involved in the farming operation. The IRS calls this ‘material participation’. One must meet certain criteria to be deemed a material participator. These criteria can be found in the Farmer’s Tax Guide on page 76.
Use of tax section 179 must be done so carefully and thoughtfully. If the asset is sold, you may be liable to repay any depreciation claimed. This section may not be used for real property, property gifted or inherited, property acquired from a related party, etc. In 2020, the maximum amount you could elect to deduct for most section 179 property placed in service was $1,040,000.2