The following information is for reference only and is not offered as professional tax advise. For specific tax application to your unique situation, please seek the advise of a qualified tax professional. For expert guidance, contact our friends at The Dolan Group.
In addition to the lifestyle benefits of owning
alpacas, various tax incentives are available which further enhance
their profit potential. If you are currently paying taxes and
intend to operate your farm as a for profit enterprise, you may
be able to take advantage of the accelerated depreciation available
under Section 179 of the tax code. Ordinarily, the cost of your
alpacas is considered capital expenditures and can be depreciated
over five years. However, Section 179 allows you to write off
a large portion of your capital costs before applying the
standard accelerated depreciation methods.
The economic stimulus package that became law in February 2008 contains two provisions aimed at helping alpaca breeders increase their capital spending -- a huge increase in the Section 179 tax deduction and a bonus depreciation allowance.
The Section 179 deduction, which allows small businesses to deduct up front rather than depreciate over time the cost of certain equipment, nearly has doubled for 2008, rising from $128,000 to $250,000.
The bonus depreciation provision allows businesses of any size to depreciate 50 percent of the cost of equipment, with the balance to be depreciated according to IRS rules.
It's possible for a company to take advantage of both provisions, which could mean a huge tax savings for 2008.
The Section 179 deduction is limited to companies that buy less than $800,000 in capital equipment or livestock during the year; that ceiling is the government's way of restricting the deduction to small businesses.
It's a pretty easy deduction to take, but there are a few pitfalls to watch for.
Keep in mind: The $250,000 figure is an aggregate -- you can buy as many alpacas and or any number of pieces of equipment to take the deduction, but once you go above that amount, depreciation sets in.
Equipment must be bought – either purchased outright or financed -- and placed into service by Dec. 31 to qualify.
To take advantage of the Section 179 deduction, a business must expressly elect to take it on IRS Form 4562, Depreciation and Amortization. More information about the deduction can be found in the IRS Publication 946, How To Depreciate Property.
The bonus depreciation measure gives business owners a more generous first-year deduction for capital equipment. The bonus generally applies to equipment that falls under the umbrella of the Modified Accelerated Cost Recovery System, the tax code's method for depreciating property over a period of years. Under MACRS, assets are depreciated according to a timetable the government has set up for various classes of property.
Details and the depreciation timetables can be found in IRS Publication 946.
The following are excerpts...
Increased section 179 deduction dollar
limits. The maximum amount you can elect to deduct
for most section 179 property you placed in service in 2007
is $125,000. This limit is reduced by the amount by which the
cost of the property placed in service during the tax year
exceeds $420,000. See Dollar Limits under Section 179 Deduction,
later.
Depreciation limits for business cars.
The total amount of depreciation (including the section 179 deduction)
you can take for a passenger automobile (that is not an electric
vehicle or a truck or van) you use in your business and first
place in service is more fully described in the current version of the tax code.
Limited applicability of special depreciation
allowances. The additional special depreciation allowances
(including the increased limits for passenger automobiles)
do not apply to most property placed in service in 2007. Generally,
you can only claim the special depreciation allowances for
certain aircraft and certain property with a long production
period. See Claiming the Special Depreciation Allowance, later.
Reminders
Section 179 deduction limit for sport utility
vehicles. The maximum section 179 expense deduction
for certain sport utility vehicles is $25,000. For more information,
see Dollar Limits under Section 179 Deduction, later.
Amortization of business start-up costs.
You can elect to deduct certain start-up costs. The remaining
costs must be amortized over a 180-month period.
If you buy farm property such as machinery, equipment,
livestock, or a structure with a useful life of more than a year,
you generally cannot deduct its entire cost in one year. Instead,
you must spread the cost over the time you use the property and
deduct part of it each year. For most types of property, this
is called depreciation.
You can depreciate most types of tangible property
(except land), such as buildings, machinery, equipment, vehicles,
certain livestock, and furniture. You can also depreciate certain
intangible property, such as copyrights, patents, and computer
software. To be depreciable, the property must meet all the following
requirements.
- It must be property you own.
- It must be used in your business or income-producing activity.
- It must have a determinable useful life.
- It must be expected to last more than one year.
Property You Own
To claim depreciation, you usually must be the
owner of the property. You are considered as owning property
even if it is subject to a debt.
Leased property. You can depreciate
leased property only if you retain the incidents of ownership
in the property (explained later). This means you bear the burden
of exhaustion of the capital investment in the property. Therefore,
if you lease property from someone to use in your trade or business
or for the production of income, you generally cannot depreciate
its cost because you do not retain the incidents of ownership.
You can, however, depreciate any capital improvements you make
to the leased property. See Additions and Improvements under
Which Recovery Period Applies in chapter 4 of Publication
946. If you lease property to someone, you generally can depreciate
its cost even if the lessee (the person leasing from you) has
agreed to preserve, replace, renew, and maintain the property.
However, you cannot depreciate the cost of the property if the
lease provides that the lessee is to maintain the property and
return to you the same property or its equivalent in value at
the expiration of the lease in as good condition and value as
when leased.
Incidents of ownership. Incidents
of ownership of property include the following.
- The legal title to the property.
- The legal obligation to pay for the property.
- The responsibility to pay maintenance and operating expenses.
- The duty to pay any taxes on the property.
- The risk of loss if the property is destroyed,
condemned, or diminished in value
through obsolescence or exhaustion.
Property Used in Your Business or Income-Producing Activity
To claim depreciation on property, you must use
it in your business or income-producing activity. If you use
property to produce income (investment use), the income must
be taxable. You cannot depreciate property that you use solely
for personal activities.
Partial business or investment use.
If you use property for business or investment purposes and for
personal purposes, you can deduct depreciation based only on
the percentage of business or investment use.
Inventory. You can never depreciate
inventory because it is not held for use in your business. Inventory
is any property you hold primarily for sale to customers in the
ordinary course of your business.
Livestock. Livestock purchased
for draft, breeding, or dairy purposes can be depreciated only
if they are not kept in an inventory account.
Livestock you raise usually has no depreciable
basis because the costs of raising them are deducted and not
added to their basis. However, see Immature livestock under When
Does Depreciation Begin and End, later.
Property Having a Determinable Useful Life
To be depreciable, your property must have a determinable
useful life. This means it must be something that wears out,
decays, gets used up, becomes obsolete, or loses its value from
natural causes.
Irrigation systems and water wells.
Irrigation systems and wells used in a trade or business can
be depreciated if their useful life can be determined. You can
depreciate irrigation systems and wells composed of masonry,
concrete, tile, metal, or wood. In addition, you can depreciate
costs for moving dirt to construct irrigation systems and water
wells composed of these materials. However, land preparation
costs for center pivot irrigation systems are not depreciable.
Dams, ponds, and terraces. In
general, you cannot depreciate earthen dams, ponds, and terraces
unless the structures have a determinable useful life.
Property Lasting More Than One Year
To be depreciable, property must have a useful
life that extends substantially beyond the year you place it
in service.
What Property Cannot Be Depreciated?
Certain property cannot be depreciated. This includes
the following.
Land
You can never depreciate the cost of land because
land does not wear out, become obsolete, or get used up. The
cost of land generally includes the cost of clearing, grading,
planting, and landscaping. Although you cannot depreciate land,
you can depreciate certain costs incurred in preparing land for
business use. See chapter 1 of Publication 946.
When Does Depreciation Begin and End?
You begin to depreciate your property when you
place it in service for use in your trade or business or for
the production of income. You stop depreciating property either
when you have fully recovered your cost or other basis or when
you retire it from service, whichever happens first.
Placed in Service
Property is placed in service when it is ready and available
for a specific use, whether in a business activity, an income-producing
activity, a tax-exempt activity, or a personal activity. Even
if you are not using the property, it is in service when it is
ready and available for its specific use.
Immature livestock. Depreciation
for livestock begins when the livestock reaches the age of maturity.
If you acquire immature livestock for draft, dairy, or breeding
purposes, your depreciation begins when the livestock reach the
age when they can be worked, milked, or bred. When this occurs,
your basis for depreciation is your initial cost for the immature
livestock.
What Is the Basis of Your Depreciable Property?
To figure your depreciation deduction, you must
determine the basis of your property. To determine basis, you
need to know the cost or other basis of your property.
Cost as basis. The basis of property
you buy is its cost plus amounts you paid for items such as sales
tax, freight charges, and installation and testing fees. The
cost includes the amount you pay in cash, debt obligations, other
property, or services.
Other basis. Other basis refers
to basis that is determined by the way you received the property.
For example, your basis is other than cost if you acquired the
property as a gift or as an inheritance. If you acquired property
in this or some other way, see Basis Other Than Cost in chapter
6 to determine your basis.
Property changed from personal use. If
you held property for personal use and later use it in your business
or income-producing activity, your depreciable basis is the lesser
of the following.
- The fair market value (FMV) of the property on the date of
the change in use.
- Your original cost or other basis adjusted as follows.
- Increased by the cost of any permanent improvements
or additions and other costs
that must be added to basis.
- Decreased by any tax deductions you claimed
for casualty and theft losses
and other items that reduced your
basis.
How Do You Treat Improvements?
If you improve depreciable property, you must
treat the improvement as separate depreciable property. For more
information on improvements, see Publication 946.
Repairs. You generally deduct
the cost of repairing business property in the same way as any
other business expense. However, if a repair or replacement increases
the value of your property, makes it more useful, or lengthens
its life, you must treat it as an improvement and depreciate
it.
Improvements to rented property.
You can depreciate permanent improvements you make to business
property you rent from someone else.
Records
It is important to keep good records for property
you depreciate. Do not file these records with your return. Instead,
you should keep them as part of the permanent records of the
depreciated property. They will help you verify the accuracy
of the of the depreciation of assets placed in service in the
current and previous tax years. For general information on recordkeeping,
see Publication 583, Starting a Business and Keeping Records.
For specific information on keeping records for section 179 property
and listed property, see Publication 946.
What Property Qualifies?
To qualify for the section 179 deduction, your
property must meet all the following requirements:
- It must be eligible property.
- It must be acquired for business use.
- It must have been acquired by purchase.
Eligible Property
To qualify for the section 179 deduction, your property must be one of the
following types of depreciable property.
- Tangible personal property.
- Other tangible property (except buildings and their structural
components) used as:
- An integral part of manufacturing, production,
or extraction or of furnishing
transportation, communications,
electricity, gas, water, or sewage disposal services.
- Decreased by any tax deductions
you claimed for casualty and theft losses
and other
items that reduced your basis.
- A research facility used in connection with any of the activities in (a) above, or
- A facility used in connection with any of
the activities in (a) for the bulk storage of
fungible commodities.
- Single purpose agricultural (livestock) or horticultural
structures.
- Storage facilities (except buildings and their
structural components) used in
connection with distributing
petroleum or any primary product of petroleum.
- Off-the-shelf computer software.
Tangible personal property. Tangible
personal property is any tangible property that is not real property.
It includes the following property.
Machinery and equipment.
Property contained in or attached to a building (other than structural components),
such as milk tanks, automatic feeders, barn cleaners, and office equipment.
Gasoline storage tanks and pumps at retail service
stations.
Livestock, including horses, cattle, hogs,
sheep, goats, and mink and other fur-bearing animals.
Single purpose agricultural or horticultural
structures. A single purpose agricultural (livestock)
or horticultural structure is qualifying property for purposes
of the section 179 deduction.
Agricultural structure.
A single purpose agricultural (livestock) structure is any building
or enclosure specifically designed, constructed, and used for
both the following reasons.
To house, raise, and feed a particular type of
livestock and its produce.
To house the equipment, including any replacements,
needed to house, raise, or feed the livestock.
For this purpose, livestock includes poultry.
Single purpose structures are qualifying property
if used, for example, to breed chickens or hogs, produce milk
from dairy cattle, or produce feeder cattle or pigs, broiler
chickens, or eggs. The facility must include, as an integral
part of the structure or enclosure, equipment necessary to house,
raise, and feed the livestock.
Use of structure. A structure
must be used only for the purpose that qualified it. For example,
a hog barn will not be qualifying property if you use it to house
poultry. Similarly, using part of your greenhouse to sell plants
will make the greenhouse nonqualifying property.
If a structure includes work space, the work space
can be used only for the following activities.
Stocking, caring for, or collecting livestock
or plants or their produce.
Maintaining the enclosure or structure.
Maintaining or replacing the equipment or stock
enclosed or housed in the structure.
Property Acquired for Business Use
To qualify for the section 179 deduction, your
property must have been acquired for use in your trade or business.
Property you acquire only for the production of income, such
as investment property, rental property (if renting property
is not your trade or business), and property that produces royalties,
does not qualify.
Partial business use. When you
use property for business and nonbusiness purposes, you can elect
the section 179 deduction only if you use it more than 50% for
business in the year you place it in service. If you used the
property more than 50% for business, multiply the cost of the
property by the percentage of business use. Use the resulting
business cost to figure your section 179 deduction.
Property Acquired by Purchase
To qualify for the section 179 deduction, your
property must have been acquired by purchase. For example, property
acquired by gift or inheritance does not qualify.
How Much Can You Deduct?
Your section 179 deduction is generally the cost of the qualifying property.
However, the total amount you can elect to deduct under section 179 is
subject to a dollar limit and a business income limit. These limits apply
to each taxpayer, not to each business.
If you deduct only part of the cost of qualifying
property as a section 179 deduction, you can generally depreciate
the cost you do not deduct.
Trade-in of other property. If
you buy qualifying property with cash and a trade-in, its cost
for purposes of the section 179 deduction includes only the cash
you paid. For example, if you buy (for cash and a trade-in) a
new tractor for use in your business, your cost for the section
179 deduction is the cash you paid. It does not include the adjusted
basis of the old tractor you trade for the new tractor.
Dollar Limits
The total amount you can elect to deduct under
section 179 for most property placed in service in 2005 is $105,000.
If you acquire and place in service more than one item of qualifying
property during the year, you can allocate the section 179 deduction
among the items in any way, as long as the total deduction is
not more than $105,000. You do not have to claim the full $105,000.
Reduced dollar limit for cost exceeding
$420,000. If the cost of your qualifying section 179
property placed in service in 2005 is over $420,000, you must
reduce the dollar limit (but not below zero) by the amount
of cost over $420,000. If the cost of your section 179 property
placed in service during 2005 is $525,000 or more, you cannot
take a section 179 deduction and you cannot carry over the
cost that is more than $525,000.
Married individuals. If you are
married, how you figure your section 179 deduction depends on
whether you file jointly or separately. If you file a joint return,
you and your spouse are treated as one taxpayer in determining
any reduction to the dollar limit, regardless of which of you
purchased the property or placed it in service. If you and your
spouse file separate returns, you are treated as one taxpayer
for the dollar limit, including the reduction for costs over
$420,000. You must allocate the dollar limit (after any reduction)
equally between you, unless you both elect a different allocation.
If the percentages elected by each of you do not total 100%,
50% will be allocated to each of you.
Business Income Limit
The total cost you can deduct
each year after you apply the dollar limit is limited to the
taxable income from the active conduct of any trade or business
during the year. Generally, you are considered to actively
conduct a trade or business if you meaningfully participate
in the management or operations of the trade or business.
Any cost not deductible in
one year under section 179 because of this limit can be carried
to the next year. See Carryover of disallowed deduction, later.
Taxable income.
In general, figure taxable income for this purpose by totaling
the net income and losses from all trades and businesses you
actively conducted during the year. In addition to net income
or loss from a sole proprietorship, partnership, or S corporation,
net income or loss derived from a trade or business also includes
the following items.
Section 1231 gains (or losses)
as discussed in chapter 9.
Interest from working capital
of your trade or business.
Wages, salaries, tips, or other
pay earned as an employee. In addition, figure taxable income
without regard to any of the following.
The section 179 deduction.
The self-employment tax deduction.
Any net operating loss carryback
or carryforward.
Any unreimbursed employee business
expenses.
Partnerships and S Corporations
The section 179 deduction limits
apply both to the partnership or S corporation and to each
partner or shareholder. The partnership or S corporation determines
its section 179 deduction subject to the limits. It then allocates
the deduction among its partners or shareholders.
If you are a partner in a partnership
or shareholder of an S corporation, you add the amount allocated
from the partnership or S corporation to any section 179 costs
not related to the partnership or S corporation and then apply
the dollar limit to this total. To determine any reduction
in the dollar limit for costs over $420,000, you do not include
any of the cost of section 179 property placed in service by
the partnership or S corporation. After you apply the dollar
limit, you apply the business income limit to any remaining
section 179 costs. For more information, see chapter 2 of Publication
946.
Claiming the Special Depreciation Allowance
For qualified property placed in service in 2005,
you can take an additional 50% (or 30%, if applicable) special
depreciation allowance. The allowance is an additional deduction
you can take after any section 179 deduction and before you figure
regular depreciation under MACRS. This part of the chapter explains
what is qualified property, how to figure the allowance, and
how to elect not to claim it.
Depreciating the remaining cost. After
you figure the special depreciation allowance for your qualified
property, you can use the remaining cost to figure your regular
MACRS depreciation deduction (discussed later). In the year you
claim the special allowance (the year you place the property
in service), you must reduce the depreciable basis of the property
by the allowance before figuring your regular MACRS depreciation
deduction.
Farm Property Recovery Periods
Recovery Period in Years
Assets GDS ADS
Agricultural structures (single purpose) 10 15
Automobiles 5 5
Calculators and copiers 5 6
Cattle (dairy or breeding) 5 7
Communication equipment 1 7 10
Computer and peripheral equipment 5 5
Drainage facilities 15 20
Farm buildings 2 20 25
Farm machinery and equipment 7 10
Fences (agricultural) 7 10
Goats and sheep (breeding) 5 5
Grain bin 7 10
Hogs (breeding) 3 3
Horses (age when placed in service)
Breeding and working (12 years or less) 7 10
Breeding and working (more than 12 years) 3 10
Racing horses (more than 2 years) 3 12
Horticultural structures (single purpose) 10 15
Logging machinery and equipment 3 5 6
Nonresidential real property 39 4 40
Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters)
7 10
Paved lots 15 20
Residential rental property 27.5 40
Tractor units (over-the-road) 3 4
Trees or vines bearing fruit or nuts 10 20
Truck (heavy duty, unloaded weight 13,000 lbs. or more) 5 6
Truck (actual weight less than 13,000 lbs) 5 5
Water wells 15 20
1 Not including communication equipment listed in other classes.
2 Not including single purpose agricultural or horticultural structures.
3 Used by logging and sawmill operators for cutting of timber.
4 For property placed in service after May 12, 1993; for property placed
in service before May 13, 1993, the recovery period is 31.5 years.
Farming business. A farming business
is any trade or business involving cultivating land or raising
or harvesting any agricultural or horticultural commodity. A
farming business includes the following.
What Is the Business-Use Requirement?
You can claim the section 179 deduction for listed
property and depreciate listed property using GDS and a declining
balance method, if the property meets the business-use requirement.
To meet this requirement, listed property must be used predominantly
(more than 50% of its total use) for qualified business use.
If this requirement is not met, the following rules apply.
Property not used predominantly for qualified business
use during the year it is placed in service does not qualify
for the section 179 deduction.
Any depreciation deduction under MACRS for property
not used predominantly for qualified business use during any
year must be figured using the straight line method over the
ADS recovery period. This rule applies each year of the recovery
period.
Excess depreciation on property previously used
predominantly for qualified business use must be recaptured (included
in income) in the first year in which it is no longer used predominantly
for qualified business use.
A lessee must include an amount in income if the
leased property is not used predominantly for qualified business
use.
Investment use. The use of property
to produce income in a nonbusiness activity (investment use)
is not a qualified business use. However, you can treat the investment
use as business use to figure the depreciable basis of the property.
Allocating use. To determine whether
the business-use requirement is met, you must allocate the use
of any item of listed property used for more than one purpose
during the year among its various uses.
How long to keep records. For
listed property, you must keep records for as long as any excess
depreciation can be recaptured (included in income). Recapture
can occur in any tax year of the recovery period.
