Depreciable Agricultural Equipment – How Farms Can Save Big on Taxes
How are your farm’s taxes shaping up this year? Well, there might be good news. If you purchase some agricultural equipment, you may be able to use any one of several tax benefits created specifically for farmers that take advantage of the depreciation of those farm assets.
Yes, talking taxes can get pretty technical, but we’re here to try and make it simpler. We’ll explain how depreciation of farm assets work, some of the tax benefits you can take advantage of, and some farm machinery and equipment you can purchase that qualifies.
We’ll discuss farm equipment depreciation, three methods to calculate depreciation expense and their advantages, as well as more obscure terms like bonus depreciation and section 179.
Note: We’re not tax professionals and you should consult an independent expert before making any important decisions.
Farm equipment depreciation – What is it?
In short, depreciation simply refers to the reduction in value of an asset that was purchased at high cost. Oftentimes, depreciable assets can be resold, and that resale value affects how much you can save on taxes. Other times, the asset gets retired when it reaches the end of its useful life.
For tax purposes, depreciation is an accounting strategy you can use to recover some of the value of an asset by spreading out its cost as a tax deduction over a certain number of years. The number of years differs depending on the asset and the whims of the IRS rules.
Depreciation begins in the tax year when the asset is purchased, and ends when it has fully recovered its value, gets sold, or reaches the end of its useful life.
Think of things like a tractor or even a regular vehicle. The moment you buy it, it begins losing value. And from that point on, wear and tear continues to degrade the value. That loss of value is a depreciation expense, and agricultural businesses can recover some of that depreciated value to reduce their tax burdens.
3 Depreciation Methods
The most widely used depreciation tax program is known as the Modified Accelerated Cost Recovery System (MACRS), which was established as part of the Tax Reform Act in 1986. MACRS has three methods you can use to calculate depreciation for your purchased farm assets.
The details of farm asset depreciation are complicated, so we’re going to keep it brief.
The primary difference between the three methods is in how much of a tax credit you get each year, and how much it changes over time.
Straight-line method
With this method, the salvage value of the asset gets divided by the useful life or recovery period of that asset. There are IRS tables detailing all the specifics for various farm property and machinery.
For example, if you purchase a tractor for $50,000, its salvage value is determined to be $10,000, and its useful life is determined to be 10 years, you would divide $40,000 by 10 to get $4000.
Every year for the ten years after making the purchase and claiming a depreciation expense, it gets deducted from your taxable income and reduces it by $4000 (using the straight-line method).
150 percent-declining balance method
With this approach, the tax deductions are weighted more heavily toward the early years of the useful life. Using the same example as above, for the first year you would divide 1.5 by 10 and multiply that by the value of the tractor that year — the year you purchased it — which in this example is $50,000.
For that first year, the MACRS depreciation would equal $7500. Notice that this is quite a bit larger than $4000 using the previous method.
For the second year, you do the same calculation, except now the asset’s cost has decreased by $7500, which means you would multiply by $42,500 for the second year’s depreciation. That would come to $6375.
Each subsequent year, the tax deduction declines because the value of the asset is declining. By the tenth year, the tax deduction will be much smaller than with straight-line depreciation.
The important thing to realize here is that the total tax deduction, added up over 10 years, ends up the same either way. With the percent-declining balance method, you just get more of the deduction on the front end.
200 percent-declining balance method
This is the same method as the previous one, except here you divide 2 by the years of useful life or recovery period. This method weights the tax deductions even more strongly to the early years of that time period.
For our previous example, that would be 2 divided by 10 times $50,000 for the first year, which is a $10,000 reduction in taxable income for that tax year. And the second year would now use $40,000 for the value, and result in a tax deduction of $8000.
Make sense? Again, you can find a more detailed explanation of all of this if you’d like to do more research.
Advantages of each MACRS depreciation method
A tax accountant who understands farm asset depreciation would be the best person to talk to about this.
We’re not tax professionals. However, we’re pretty familiar with depreciation because solar energy systems purchased by agricultural businesses can benefit from the general depreciation system, and clients use it all the time.
The decision often comes down to one of cash flow. You just bought an expensive piece of equipment. Farm assets depreciate in value whether we like it or not. With the percent-declining balance methods, you’ll recover more of that depreciation in just a few years, and will then have that money to re-invest in your business, or simply recover faster from the big purchase price and be in a better financial position.
If you’d prefer to enjoy the tax deductions over a longer period of time and are in less of a rush to recover your costs, you’d go with the straight-line method. Again — the total amount of the tax deduction is the same in all three cases.
There are other reasons to choose each method besides this. It’s something to discuss with a tax professional.
What about bonus depreciation and section 179?
Bonus depreciation is one of the tax incentives enacted as part of the Tax Cuts and Jobs Act from 2017. This is a temporary tax benefit, and it’s reducing in value each year. Unless something changes, it will be gone as of 2027.
The idea here is just what the word “bonus” implies. In addition to MACRS depreciation, farmers can access an additional tax benefit for equipment they have purchased. This was enacted to incentivize more farmers to purchase equipment, which would benefit them and stimulate the economy.
The amount of the equipment’s value subject to bonus depreciation started off at 100%, and as of 2023 began to decline each year. Here’s the schedule:
- 80% for property placed in service in 2023
- 60% for property placed in service in 2024
- 40% for property placed in service in 2025
- 20% for property placed in service in 2026
- 0% for property placed in service in 2027 and later years
What about Section 179?
This is a different way to reduce your tax liability using depreciation for farm equipment. If you use section 179, you can still benefit from bonus depreciation. But you cannot use MACRS and section 179 at the same time for a particular piece of machinery.
For solar power systems, we typically assume you will use MACRS.
Section 179 offers a one-time tax benefit. It does not spread out over multiple years.
Examples of farm assets with substantial tax savings potential
We could go on and list dozens of types of machinery here, but that would get somewhat tiresome.
You know your business and the equipment you use that might qualify for depreciation.
Dairy farmers, for example, could potentially use depreciation to reduce their tax liability when buying machinery such as
- Feed grinders
- Balers
- Fodder trucks
- Tractors
- Irrigation systems
Poultry farmers would use a different set of machinery, most of which enables the poultry houses to be built and to function so the flocks survive and thrive. Grain farms, hog farms, and all the other types of farms also use particular types of equipment.
Talk to your tax professional and find out which equipment you’ve recently purchased, or are planning to purchase, can be used for tax depreciation.
Solar power and tax depreciation
Beyond all that, there’s another type of equipment that nearly any agricultural business can use and that works great for MACRS depreciation — solar power.
Farms use a lot of energy, especially poultry farms and dairy farms. Energy costs continue to skyrocket and aren’t showing any signs of slowing down. As the obsession over electrifying everything continues, the costs of power will only get more expensive.
Your way out of all that energy bill inflation is solar power.
When you generate your own power, you don’t have to pay the utility for it. So they can raise their prices all they want, and you’ll only have to pay those rates for times of year when your solar panels don’t quite produce all the energy your farm needs.
Countless farmers have recovered their entire investment into solar energy within five years. Sometimes recovery periods take less than two — especially if the farmer wins a REAP grant.
And MACRS depreciation is one of the reasons solar is such a great deal. In addition to the 30% federal tax credit for renewable energy that you already get, you also get the depreciation tax deduction using whichever of the three methods you choose.
Residential solar can’t get this benefit
These benefits don’t extend to homeowners — only farms, agricultural businesses, and rural small businesses.
With the 30% solar tax credit, the REAP grant, the free energy you’ll be generating, and MACRS depreciation, your farming business will be able to fully recover the cost of your solar energy system in just a few years.
Save HUGE money with solar power for farms
If you like what you’ve read so far – escaping energy inflation and saving money on taxes using farm asset depreciation and other federal tax credits – don’t wait until the government changes its mind and alters these programs.
Use them now while they’re in full force!
Get a fast solar power quote and find out how your agricultural business can benefit from solar power.
