How to Figure the IRS Depreciation on Farm Equipment
Farming is capital intensive. Plant, property and equipment make up a large portion of the balance sheet. Due to the expensive nature of farming, depreciation can be a significant factor to the bottom line. The IRS applies the same rules regarding depreciation on farming equipment as it does for other assets. Farmers can use several depreciation methods, depending on the type of equipment. The easiest and most common method is referred to as the straight-line depreciation methodology.
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Instructions
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Review the formula for annual depreciation expense. The formula is (Cost of Farm Equipment - Salvage Value)/Useful Life. The salvage value is the value of the equipment after its useful life. For instance, some farm equipment can be scrapped for precious metals. The useful life is an estimate given by the manufacturer on the number of years the equipment will operate.
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Walk through an example. Lets assume the equipment cost $20,000. According to the manufacturer the useful life is 5 years, and at the end of 5 years the manufacturer will buy the equipment back for $5,000. Compute depreciation expense using straight-line depreciation.
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Subtract the salvage value from the cost of the equipment. This is: $20,000 - $5,000 or $15,000. Divide $15,000 by the useful life (5). This is: $15,000/5 = $3,000. The annual depreciation expense is $3,000. $3,000 should be written off each year the equipment is in use over the next 5 years.
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Walk through the transaction using account language. At the end of Year 1, depreciation expense is $3,000, accumulated depreciation is $3,000, and the value of the equipment is $17,000. At the end of Year 2, depreciation expense is still $3,000, but accumulated depreciation is now $6,000, and the accounting value of the equipment is $14,000. This continues until the equipment is fully expensed.
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