Tax Credits for Farm Equipment
The Internal Revenue Service (IRS) has given farmers different tax deductions and tax credits. This has been a result of several laws that are aimed at easing the financial burden on farmers to encourage them to continue producing food to feed the American population. The laws governing taxation of farmers are found in the IRS Publication 225 Farmers’ Tax Guide.
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Farmers use different types of equipment in their farms. Some of these implements are heavy machinery that can be quite expensive and would be a big financial burden if the farmers did not get tax breaks for purchasing or hiring them. The IRS has categorized farm assets and investments into two categories: deductible business expenses and capital expenses. The deductible expenses are deductible from the farmer’s income taxes if the farm is a pass-through entity. The capital expenses are depreciated with time.
Depreciation
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Farm equipment lasts for a certain duration of time and gradually loses value over time. The IRS depreciation rules allow the farmer to deduct a fraction of the value of equipment during the expected useful value of the property. This continues until the farmer has taken full depreciation on the full value of the property. Depreciation is applied to farm property and equipment such as machinery, farm buildings and irrigation systems.
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Full Tax Deductions
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Farm property and equipment usually have a useful life longer than one year. It is therefore not possible to take a full tax deduction on these items during the first year. Exceptions to this rule are provided for under Section 179 of the Farmers’ Tax Guide. The IRS tax code allows farmers to make deductions on items that are bought or serviced and used up within the year. Some of these items include fertilizers, animal feeds and seed. Others are fuel, insurance premiums and wages and benefits. The costs of routine repairs and maintenance can also be deducted, provided they do not significantly prolong the life of an asset.
Capital Expenditures
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This section allows farmers to make deductions on certain qualified capital expenditures that are often subjected to depreciation rules. The Small Business Jobs and Credit Act allows business owners, including farmers, to make deductions up to $500,000 of qualified capital expenses. These expenditures phase out when the total capital expenditures reach $2 million. Farmers can take an immediate tax deduction of as much as 50 percent of the cost of depreciable equipment. This is designed to boost their cash flow.
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