How to Separate Your Farm Operation From the Land

Accounting for farm assets

Setting up an asset account for your farm operation requires separating land value from the operation. You may depreciate equipment, barns, storage bins and other facilities used in farming, but not farmland. For tax purposes, costs put into farming the land are expenses and deductible from the farm's gross income. Finance charges, property taxes and legal fees associated with the land are recognizable expenses by the IRS. However, the actual purchase price of the land is not an expense for your farm operation.

Things You'll Need

• Total cost of farm operation
• Fair market value of land in the county and township
• Township phone number
• Acreage total
• Total square footage of individual farm outbuildings
• Farm equipment trader magazine

Instructions

1. Contact the township assessor where the farm operation is located. Request the current value per acre that the township uses to determine state equalized value (SEV) for tillable acreage in large parcels. Also, request the value per square foot used to determine the SEV of barns and storage bins.

2. Multiply the per acre value by the total farm acreage. For example, if the assessor indicates that farmland is currently being assessed at $5,000 per acre and your farm is 200 acres then the value of your farmland is $1,000,000.

3. Subtract the total value of the farmland from the actual purchase price of the farm operation. For example, if you paid $1,800,000 for the farm operation and the land value is $1,000,000 then the amount you can depreciate and divide among the remaining assets is $800,000.

4. Divide the amount you can depreciate ($800,000 in the example) among the various barns, storage bins and equipment. If you do not have a current appraisal to assign value to various farm buildings, use the value per square foot for buildings that the township assessor gave you. Estimate the value of pieces of equipment using a current farm equipment trader magazine.

5. Set up your list of assets for the farm operation. Include the land as an asset for the farm operation at the value you calculated, but do not choose a depreciation schedule for the land. The farmland will remain at the purchase price while other farm assets will depreciate in value each year.

Tips & Warnings

• The local farm elevator or mill is also an excellent source of information for current values and practices.

• Software specific to farm operations is available to help setup and maintain the books for your farm.

• Check current IRS regulations when buying a farm operation or adding equipment as they frequently make adjustments or changes to depreciation schedules.

References

• Basis of Farm Assets
• Is Your Farm Business Accurately Measuring Profitability
• DEPRECIATION UNDER GAAP
• Figuring Depreciation Under MACRS

Resources

• Starting a Business and Keeping Records
• Business Expenses
• Organic Farming Systems Links