A Checklist for Farm Depreciation on Taxes

Tax form
Tax form (Image: tax forms image by Chad McDermott from Fotolia.com)

The Internal Revenue Service defines depreciation as an income-tax deduction that enables taxpayers to write off money spent on selected property. “Because farming is a capital-intensive industry, a farmer is allowed cost recovery--or depreciation--on machinery, equipment and buildings,” states the IRS website. “Depreciation is also allowed on purchased livestock acquired for breeding, draft and sporting purposes.”

Depreciation Requirements

The IRS points out that property has to meet several requirements to be deducted as depreciation. That includes the fact that the person paying tax has to own the farm property. You may also depreciate any capital improvements you've made on property that you are leasing, according to the IRS website.

The farm property also needs to be used for business. If the farm is used for both business and personal purposes, you can only take the depreciation deductions on the business part of the property. Tools that you claim must be used in capital improvements of the farm.

Use the Proper Form

According to the IRS, taxpayers claiming farm depreciation need to use Form 4562, which is titled “Depreciation and Amortization.” The form is separated into six sections, and the instructions detail when and how to fill out each section. Both the form and instructions are available to download from the IRS website.

What Can Be Deducted

According to the IRS, deductions qualify for the same tax-year that property is put into service. That property includes such tangible items as machinery; equipment; trucks; tools; fences connected with raising livestock; paved feedlots; water wells furnishing water for poultry, livestock or to irrigate crops; drainage tiles; productive orchards, groves and vineyards; bins; gas; storage tanks; silos; purchased livestock that is used to breed cattle, hogs, sheep and dairy cattle; and single-purpose horticultural structures or livestock.

Livestock (Image: bullock 1 image by PeteG from Fotolia.com)

Water Depletion

The IRS points out that depleted natural water supplies can also be claimed as a farm depreciation. “Cost depletion for water rights is allowed when it can be demonstrated that the ground water is being depleted and that the rate of recharge is so slow that, once extracted, the water is lost to the farmer and to immediately succeeding generations,” the IRS website states.

Water depletion
Water depletion (Image: pond image by Soja Andrzej from Fotolia.com)

Property That Cannot be Depreciated

The IRS’s website points out that farm property cannot be deducted if it was inherited or received as a gift; received as a trust or estate; traded for other property; passed down through a family or given by a spouse.

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