How Fast Can We Depreciate Vines and Plants

• February 20, 2018
• Paul Neiffer

Under the old tax laws, farmers who farm vineyards, orchards and other long-lived plants are required to capitalize all of the costs related to these plantings until the crop reaches “commercial production” (usually 3-5 years).  These costs include direct costs and all indirect costs associated with the planting the crop including capitalizing depreciation on the equipment used during this period.

Once the plants reached commercial production, the farmer can then depreciate those costs over 10 years or take either Section 179 or bonus depreciation on the costs.  Farmers could also elect to expense all of these costs (other than the cost of the plants); however, in return they were required to use ADS depreciation (longer lives) and could not take bonus depreciation on any farm assets.

Starting for plantings in 2016, farmers could elect to take 50% bonus depreciation on the cost of the specified plants.  However, the IRS has never provided guidance telling us what costs are included.  Is it just the cost of the plant or does it include all direct and indirect costs in the year of planting.

Now, let’s roll forward to the new tax law.  We now have 100% bonus depreciation at least until December 31, 2022.  Also, if farmers have gross receipts under $25 million, they are now allowed to expense all of the direct and indirect costs associated with the plantings.  This would include the costs of the plants since the farmers is allowed to use 100% bonus depreciation on these costs.

However, for those farmers who had made the election to expense direct and indirect costs but not have bonus depreciation available; we are not sure if they can “now” elect back into the system.  If they can elect back into the system and their revenues are less than $25 million, then they can now expense all of these costs immediately.  If they can’t elect back in, they are stuck with expensing costs, but not be able to take bonus depreciation on all farm assets.  This is true even if they have not planted any orchards or vineyards for several years.

Let’s look at an example:

Sam, a farmer planted an orchard back in 2010 and his revenues are less than $25 million.  He had elected to expense all costs.  This prevented him from taking bonus depreciation on any farm assets.  It is now 2018 and he purchases $2 million of farm equipment.  If he cannot go back into the “old” system, he cannot take any bonus depreciation on the new farm equipment and can only take Section 179 and regular depreciation.  However, if he can go back in, then all $2 million would qualify for bonus depreciation.

We will need to wait for IRS guidance on how to treat these situations.

 

 

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