Farm Depreciation Rules for Agricultural Businesses

Depreciation is an accounting method that allows a business to deduct the cost of a tangible asset over its useful life. By deducting a portion of an asset’s cost each year, farmers can lower their annual taxable income and reduce their tax liability. This process allocates an asset’s expense over the time it is used to generate revenue and is governed by specific tax rules.

Eligible Farm Property for Depreciation

Assets used in a farming operation can be depreciated if they have a useful life of more than one year and are used to produce income. A primary category is farm machinery and equipment, which includes items like tractors, combines, plows, planters, and balers.

Purchased livestock is another category, applying to animals acquired for draft, breeding, dairy, or sporting purposes. These are distinct from livestock raised for resale, which are treated as inventory. Depreciation applies to animals that are part of the productive operation.

Buildings and various structures also qualify for depreciation. These include general-purpose structures like barns and machine sheds, as well as single-purpose agricultural or horticultural structures such as greenhouses, poultry houses, and milking parlors.

Certain improvements made to land are also depreciable. Land itself is not depreciable because it has an unlimited useful life. Depreciable land improvements include items such as fences, water wells, paved lots, and drainage tiles.

Key Information Needed for Depreciation Calculations

To calculate depreciation, a farmer must gather specific information for each asset. The first is the asset’s cost basis. For a purchased asset, the basis is its purchase price plus costs to place it in service, like sales tax, shipping, and installation. If an asset is constructed, the basis includes the cost of materials and labor.

The second is the date the asset was placed in service. This is not always the same as the purchase date. The placed-in-service date is the day the asset is ready and available for its specific use, which is when the depreciation period begins.

A third piece of information is the business-use percentage. Depreciation can only be claimed on the portion of an asset’s cost that corresponds to its use in the farming business. If an asset is used for both business and personal purposes, the cost must be allocated based on the percentage of time it is used for the farm.

Standard Depreciation Calculation Methods (MACRS)

The standard method for depreciating farm property is the Modified Accelerated Cost Recovery System (MACRS). MACRS categorizes assets into different classes with specified recovery periods and is divided into two subsystems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).

GDS is the most common subsystem and allows for faster depreciation. Under GDS, assets are assigned a specific recovery period. Common recovery periods for farm assets include:

• 3-year property: Breeding hogs.
• 5-year property: Breeding or dairy cattle, light trucks, and new farm machinery like tractors.
• 7-year property: Used farm machinery and grain bins.
• 10-year property: Single-purpose agricultural structures, like greenhouses.
• 15-year property: Land improvements, including fences and water wells.
• 20-year property: General-purpose farm buildings, such as barns and machine sheds.

GDS also uses conventions like the half-year convention, which treats assets as if they were placed in service in the middle of the tax year, regardless of the actual purchase date.

The Alternative Depreciation System (ADS) uses a straight-line method, where the deduction is the same each year over a longer recovery period than GDS. ADS is mandatory for certain property, but farmers can also elect to use it for any class of property. An election to use ADS for one asset class applies to all property in that class placed in service during that year.

Accelerated Depreciation Options (Section 179 and Bonus)

Farmers can also use accelerated depreciation to increase deductions in the year an asset is acquired. The Section 179 deduction allows a business to expense the entire cost of qualifying property, up to a limit, in the first year it is placed in service. For 2025, the maximum deduction is $1,250,000. This limit is reduced if the total cost of property placed in service during the tax year exceeds $3,130,000.

Qualifying property includes new and used tangible personal property like machinery, equipment, and purchased livestock.

Bonus depreciation is another option that allows for an additional first-year deduction on qualified property. Unlike Section 179, bonus depreciation is not subject to an income limitation and is applied automatically unless the taxpayer elects out. The rate for bonus depreciation is 40% in 2025 and 20% in 2026. It applies to property with a recovery period of 20 years or less.

These options provide flexibility in managing taxable income. A farmer can use Section 179 to expense specific assets and then apply bonus depreciation to the remaining cost of other qualifying assets. For example, a farmer could purchase a $200,000 tractor, expense the full amount using Section 179, and use bonus depreciation on other equipment purchased that year.

Reporting Depreciation and Handling Asset Dispositions

All depreciation deductions are calculated and reported on IRS Form 4562, Depreciation and Amortization. This form is filed with the farm’s annual tax return, such as Schedule F for sole proprietors or other business return types.

When a depreciated asset is sold, a farmer must understand depreciation recapture. If a farm asset is sold for a gain, the IRS may require some or all of that gain to be treated as ordinary income instead of a capital gain. The recaptured portion of the gain is equal to the amount of depreciation claimed on the asset.

This rule prevents a business from deducting an asset’s cost against ordinary income and then paying a lower capital gains tax rate on the profit from its sale. For example, if a tractor was purchased for $100,000, depreciated to a basis of $20,000, and then sold for $70,000, the first $50,000 of the gain would be subject to recapture and taxed at ordinary income rates.