Depreciation of Farm Assets under the 2017 Tax Law

by Chris Zoller, Extension Educator

The Tax Cuts and Jobs Act (TCJA) revised some differences between farm and non-farm assets and added other depreciation rules that will have a significant impact when calculating net farm income.

Revised Recovery Period for Farm Machinery & Equipment

Under the TCJA, new farm equipment and machinery placed in service after December 31, 2017, is classified as 5-year MACRS property.  Previously, machinery and equipment was classified as 7-year MACRS property.  These assets must be used in a farming business.  Equipment used in contract harvesting of a crop by another tax payer is not included in the business of farming.

Used equipment is still classified as 7-year MACRS property.  The Alternative Depreciation System (ADS) for all farm machinery and equipment, new and used, is 10 years.  Grain bins and fences are still 7-year MACRS property with a 10-year ADS life.

Farm Equipment Purchase Example:

Bill Brown purchased a new combine on September 28, 2017.  In May 2018, he purchased a new tractor and used tillage tool.  In August 2018, Bill constructed a new fence and in September he constructed a new grain bin.  These assets are MACRS recovery classes:

New combine (2017)                                    7-year

New tractor (2018)                                5-year

Used tillage tool                                             7-year

Fence (2018)                                                   7-year

Grain bin (2018)                                             7-year

New Rules for Depreciation Methods

Assets placed in service after December 31, 2017, have depreciation rates increased to 200% Declining Balance (DB) for those farm assets in the 3, 5, 7, and 10-year MACRS recovery classes.  Assets in the 15 and 20-year MACRS recovery classes are still limited to a maximum of 150% DB.  Residential rental property and nonresidential real property continue to be limited to Straight Line (SL) depreciation.

Farm Equipment Depreciation Example:

Bill Brown paid $430,000 in 2017 for the new combine.  He elected out of bonus depreciation and did not elect any Section 179 expense deduction.  The half-year convention applies.  Bill depreciates the combine over a 7-year MACRS recovery class using the 150% DB method.  His depreciation is:

[($430,000/7) x 0.5 x 150%] = $46,071

What is the difference if Bill waited until 2018 to make the combine purchase?

[($430,000/5) x 200%) = $86,000

$86,000 – $46,071 = $39,929 more than if purchased in 2017

Excess Depreciation

The increase in the rate of depreciation, combined with the shorter MACRS recovery class for new farm equipment and machinery, may generate more depreciation than needed.  Taxpayers may choose to use the Straight Line (SL) method of depreciation and may also elect to use the 150% method.  Both elections are made on a class-by-class basis each year.  To further reduce the amount of depreciation, you may elect to use the ADS, which calculates depreciation using the SL method and lengthens the recovery period.

Resources

For additional information about this topic, contact your tax advisor or visit: https://www.irs.gov/newsroom/new-rules-and-limitations-for-depreciation-and-expensing-under-the-tax-cuts-and-jobs-act.

 

One thought on “Depreciation of Farm Assets under the 2017 Tax Law

  1. I bought a 313 acre farm 12/29/16, it has 7 grain bins and 3 barns. We just discovered the grain bins and barns were not started in depreciation in 2016 nor 2017. Thus, we want to start them in year 2019. In your opinion what value would you give the 7 grain bins and 3 barns?

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