Source: http://www.windom.org/vinyardsandorchards.html
Timestamp: 2019-04-24 16:17:13+00:00

Document:
Because farming is a capital intensive industry, a farmer is allowed cost recovery or depreciation on machinery, equipment, and buildings. Depreciation is also allowed on purchased livestock acquired for breeding, draft, and sporting purposes, unless the farmer uses the accrual method of accounting and the livestock is included in inventory. A significant expense on a farm return is depreciation.
The same depreciation rules apply to farming as to any other business. In addition to MACRS, farmers and other taxpayers have three options for depreciating property acquired after 1986 (IRC § 168).
Use straight-line method over the regular MACRS recovery period.
Use straight-line method over the regular Asset Depreciation System (ADS) midpoint (also know as class life or ADS class life). This method is usually referred to as alternative MACRS.
Use 150% declining balance method over the longer ADR midpoint life. This method is available for property other than real property, and is usually referred to as 150% MACRS.
NOTE: Vineyards and orchards are limited to straight-line depreciation.
Farm property placed in service after 1988 is limited to the 150% declining balance on property used in a farming business with less than a MACRS recovery period of 15 years, rather than the 200% available for non-farm property. This change was enacted with TAMRA 88.
There are limits in the depreciation deduction a farmer may claim on listed property placed in service after July 18, 1994. If not used more that 50% in a qualified business, the deduction is denied. If the property was placed in service before 1987, the property must be depreciated using the straight-line method over a longer life. Dollar limitations change yearly (IRC § 280F).
If the farmer is correctly using the 150% declining balance rate for farm assets placed in service after 1988, there will be an Alternative Minimum Tax (AMT) adjustment. The 150% declining balance method for farm property under normal MACRS rules is calculated using the MACRS recovery period, but under AMT rules, the depreciable life is defined as the alternative MACRS life. Usually, this is a longer time span, and an adjustment will be required in computing AMT.
IRC § 179 is an election that must be made in the tax year that the property is placed in service. The maximum Section 179 deduction for taxable years beginning after 2002 and before 2008 is limited to $100,000 with an adjustment for inflation for any taxable year beginning in a calendar year after 2003 and before 2008. The ceiling is reduced by the excess cost of qualified property placed in service during the year over $400,000, which is subject to the above mentioned adjustment for inflation. Qualified property is tangible, depreciable IRC § 1245 property that is purchased for use in the active conduct of a farm business.
Trees and vines. See “e” below, per Rev. Rul. 67-51, 1967-1 C.B. 68.
Gains from sales of IRC § 179 assets are treated as IRC § 1245 gains. The amounts expensed are recaptured as ordinary income in the year the asset is sold. The IRC § 179 expense deduction is combined with depreciation allowed to determine the amount of gain reported as ordinary income on Form 4797. This also includes sales on the installment method.
If property placed in service after 1986 is converted to personal use, or if the business usage drops to 50% or less, the IRC § 179 recapture is applicable no matter how long the property was held for business use. The amount recaptured is the excess of the IRC § 179 deduction over the amount that would have been deducted as depreciation.
Farmers are eligible for the special allowance for additional depreciation for certain property acquired after September 10, 2001 and before January 1, 2005. Refer to Pub. 225 for the definitions and tests. IRC §168(k).
Tangible personal property such as equipment, machinery, tools and trucks (Buildings and structural components are not included).
Livestock used for breeding cattle, hogs, sheep, and dairy cattle [purchased, not raised].
Single purpose livestock or horticultural structures.
Review the schedule of capital assets. If mineral rights, including water rights, are on the schedule, how they were acquired needs to be questioned. Mineral rights can be acquired in various ways. They can be purchased along with the land or they can be bought and sold separately. If purchased as part of the land, review the allocation. If an allocation was made, there should be an appraisal from a geologist. Mineral rights are a capital asset similar to land. A farmer who owns an economic interest in producing mines: oil, gas, or geothermal wells, or any other natural deposits may deduct a reasonable amount for depletion. Economic interest exists if the farmer has a legal right to receive income from the sale of natural resources. The farmer does not have an economic interest if there is only a right to buy or process the mineral deposits. The depletion deduction can be figured by either the cost method or the percentage method. Water rights are not depletable but may be subject to amortization in limited situations. As long as a farmer continues to be the owner of the land, then a loss cannot be claimed on worthless mineral rights. Any losses when the land is sold are capital losses.
An oil company drills a test well that does not produce on land rented from a farmer. Assuming that the farmer owns the mineral rights, he would only be entitled to a capital loss on the mineral rights when the land is sold, not when the well stops producing. The situation is well described in Louisiana Land & Exploration Co. v. Commissioner, 161 F.2d 842 (5th Cir. 1947).
This method may not be used for standing timber, soil, sod, dirt, water, or turf. The percentage depletion deduction cannot be more that 50% of the property’s taxable income determined without the depletion deduction and any net operating loss deduction.
For tax years beginning before January 1, 2005, the percentage for oil and gas properties is limited to 100% of the taxable income from the property (computed without the allowance for depletion). For tax years beginning after December 31, 2004, the taxable income is computed without the allowance for depletion and without the deduction under section 199. The 50% limitation still applies to all other depletable properties (IRC § 613). This distinction is important because farmers often have oil and gas interests.
How was the ground water acquisition valued?
What is similar land selling for that does not have a good water supply?
Has the farmer sold farmland on which water depletion was taken? If so, has the basis of the farmland been adjusted by any cost depletion deductions claimed in prior years.
Marketing Assistance Loans: similar to prior program, including Loan Deficiency Pmts (LDP), Marketing Loan Gains (MLGs), Certificate Exchange Gains and Forfeiture Gains.
Direct Payments: replaced Production Flexibility Contracts (PFC) and Agricultural Market Transition Act (AMTA) payments.
Counter Cyclical Payments (CCP): new.
soybean base will be created. The farmer can have some other crop base acres shifted into the soybean base.
Update base acres and keep old program yields based on 1981-1985 levels or update yields based on 1998-2001 levels.
Program yields cannot be updated unless the base acres are updated. Loan Deficiency Payments or marketing loans have the same rules as in the prior program, but with new average loan rates. They can be taken any time from harvest until May 31 of the following year. Direct Payments are based on the old program yields and the calculated “old” soybean yield, which become fixed once the base acres are determined. Payments for 2002 will be made as soon as possible after December 1; however, the FSA will deduct advance AMTA payments on 2002 crops first. In following years, up to 50 percent will be paid in December prior to the crop year, and the rest in October in the harvest year. Counter Cyclical Payments are made when the national average prices are below the target levels specified in the bill by more than the amount of the direct payment rate. They will be paid up to 35 percent in October of the harvest year (based on projected prices), up to 35 percent in February, and the remainder after September 1.
A full year depreciation claimed on assets not held a full year.
A full year depreciation claimed on assets purchased at the year end.
(See Rev. Rul. 85-82, 1985-1 C.B. 57).
A good technique is to request the taxpayer’s property tax statement. This will show the ratio between land and improvements. If the statement shows that land is 40% of the total property value, then you know that at least 40% is not depreciable. The remainder should be allocated appropriately among the other assets purchased.
Remember that you can use information from the Department of Agriculture Offices. They have a lot of information that could be helpful.
Information on land values can be obtained by contacting the local state chapter of the American Society of Farm Managers and Rural Appraisers by using their website: www.asfmra.org. The California Chapter of the American Society of Farm Managers and Rural Appraisers website is: www.calasfmra.com. However, they have the following disclaimer: “Remember the value and lease data presented in the report represents a general range of sales and rental data for each stated market. Specific sales or leases may be higher or lower than the ranges noted in any given region. Due to the many factors that characterize agricultural properties in the state, one should not assume that all properties in a certain area – or of a particular crop – will fall within the ranges shown.” Additional research will be required to accurately estimate the value of specific parcels.

References: § 168
 § 280
 § 179
 § 1245
 § 179
 § 1245
 § 179
 § 179
 § 179
 §168
 v. 
 § 613