You Can Capitalize Repairs
Our normal tax planning process is to optimize taxable income, not eliminate it. However, 2018 has been a difficult year for many farmers and they are likely to show losses on their income tax returns.
However, one option that is available to possibly eliminate a farm loss and get income to the desired level is to elect to capitalize repairs. This election is made on an annual basis, therefore, you are not locked into it once made.
The election allows you to capitalize all of your repairs and then take depreciation on it. Some might say that does not gain you anything since 100% bonus will take you back to the same net loss. Farmers (and all other taxpayers) are allowed to elect out of bonus depreciation and take regular depreciation instead.
Here is an example:
Betty has $250,000 of repair costs in 2018 and is reporting a $100,000 loss on her Schedule F. She would like to optimize her Schedule F income at $35,000 this year. Therefore, she elects to capitalize her repairs bringing her income on Schedule F to $150,000 and then elects a combination of Section 179 and regular depreciation to get her Schedule F income to around $35,000.
This is one of the best tax tools that we have to increase income and then reduce it to the desired level. Most tax software systems simply have a box that you check to make this election.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
To Cathy: used equipment? 7 years?