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Expense it or Depreciate it

Southern Ray

Southern Ray

Well-known Member
The post below got me remembering way back when I was just a young guy.
I was at one of those tractor and implement promotionals the dealers put on for the farmers in the community.
All the guys my age were standing around the beer kegs and listening to the local farmers talk shop.
One farmer took the floor and begin to tell of how he really liked his Allis Chalmers and wanted to keep it.
He put it in the shop and had the dealer completely rebuild it from back to front. He essentially had a new tractor.
He then went on as how his accountant advised him to depreciate it rather than expense it, or was it the other way around.
I was too young to fully understand the difference. I have often wondered how it came out which is better.
 
Depreciation is for a capital asset, so a rebuild could be expensed or deprecated. I align my decision to expense or depreciate with the loan time needed for that asset. So basically if I pay cash I try to expense it, if I finance it, I try to line up the finance period with the depreciation period. Most types of assets have a published depreciation time that the IRS uses. I keep my cash flow and tax liabilities aligned by doing this.

Many people have gotten in trouble expensing items on borrowed money, take the tax advantage the first year, then still owe the taxes and principal in the next years.
 
Whether to expense it in the year of purchase, or depreciate it for multiple years depends entirely on your tax situation. You don"t get to do both, nor can you switch back and forth on the same item.
 
I don't know about now, but I believe there used to be a rule that if a repair exceeded a certain percentage of the value of the machine, the cost then must be depreciated.
 
Over time the rules on whether you expense or depreciated an item has changed. Also it depends on each persons income and tax situation.

When I first started farming the rule was read to mean anything more than routine maintenance should be depreciated. Two common examples of what were new tires and an engine overhaul. It used to be common for these to be depreciated over expensed. Now most of the time they are expensed.
 
Alot of variables from one person to the next, and from one situation to another. What one person should do can vary.
 
Section 179 purchases (new and used machinery, commercial vehicles, pretty much any equipment a farmer would buy) can now be expensed in the year of purchase rather than depreciated over time- limits were in the low 6 digits for several years, but rose to $1,000,000 for 2018 taxes. So you can now just expense everything- BUT I'm not sure how it works if the expensed items cause you to have a loss for the year, so you need to talk to a tax professional experienced in farm returns to see how you should handle it. Note- H & R Block and the other franchise tax prep outfits generally do NOT understand this stuff.
 
Parts and repairs are basic expense categories on the schedule F since there has been a schedule F. Accountants love depreciation because there is more paperwork which means higher fees and those fees are repetitive over several years. In general, if you have s good year then maximise any deduction possible, poor years with high outlay you want to stretch out the deductions.
 
So you are saying I should depreciate my oil changes?

A repair is a repair. The argument could be made that a repair like an engine overhaul should be expensed but if the warranty is a for a year or less its a simple (but expensive) repair.
 
This is straight from the IRS.GOV site.

The Tax Cuts and Jobs Act changes how farmers and ranchers depreciate their business property.

So hopefully you or your tax preparer are up on the "Tax Cuts and Jobs Act".

Paul
 
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