Depreciating tile drainage systems
Increased interest in tile drainage in agricultural fields raises tax questions.
October 2, 2014 - Author: Dennis Pennington, Michigan State University Extension
Adequate drainage of agricultural fields is needed to remove excess water in plant root zones, thereby increasing productivity potential of the growing crop. Drainage also helps to alleviate poor soil conditions for farm equipment during planting and harvest operations. Installing tile drainage can also help reduce soil erosion and improve conservation efforts in agriculture.
Repairs to existing tile drains are considered cash expenses and can be deducted 100 percent in the year they occur. However, installation of new tile drainage is a capital improvement subject to depreciation. Depreciation is the method required by the IRS to spread the expense for capital improvements over a “useful life” that is predetermined. In order to calculate the depreciation for tile drainage, there are some factors you need to determine, including method of depreciation, basis, useful life of the asset, and amount of direct expense (section 179) elected by owner.
Method of depreciation
The Modified Accelerated Cost Recovery System (MACRS) is the proper depreciation method for most property including tile drainage systems. Most farms use the General Depreciation System (GDS) rather than the Alternate Depreciation System (ADS). Under GDS, you can elect 150 percent declining balance or straight line, depending on how you want to distribute your depreciable amount. Straight line spreads the depreciable amount evenly over the life of the asset. The declining balance method front loads the system, giving you larger depreciable amounts early in the life of the asset.
Basis
Basis is the total cost of the asset including the cost of tile, fittings, surveying, permits, installation and any other expenses associated with tiling your field. Tile is 100 percent business property, so the cost of the asset is the total of all associated expenses. The basis can be calculated as the total asset cost minus elected direct expense (section 179). The basis is what is used to calculate the depreciable amount each year.
Useful life of asset
Property class lives are determined by the IRS. Tile drainage systems have a property class life of 15 years. This is more commonly referred to as the useful life of the asset. This means that asset will be depreciated over 15 years.
Direct expense
You can elect to recover all or part of the cost of certain qualifying property, including tile drainage, up to a limit by deducting it in the year you place the property in service. This is the section 179 deduction. You elect or choose how much you want to direct expense, up to the limits, based on your current tax situation. When making decisions about how much to elect, you should consider the short- and long-term implications on your tax liability.
Bonus depreciation
Congress has allowed business owners and farmers to depreciate items faster than normal to stimulate the economy. Bonus depreciation rules change frequently, but need to be considered. You need to determine the current bonus depreciation rules in order to accurately determine your depreciation.
Example
You install a tile drainage system in one field that costs: $40,000.
Section 179 direct expense: $12,000.
Method: straight line.
Bonus depreciation: none figured in this example.
Depreciable basis: $28,000 ($40,000-$12,000).
Depreciation table for example tile drainage system shows the amount of depreciation and remaining basis each year. Notice it takes 16 years to completely depreciate a 15-year asset.
|
Basis = 28,000.00 |
|||
|
Year |
Rate |
Depreciation |
Remaining basis |
|
1 |
3.33% |
933.33 |
$27,066.67 |
|
2 |
6.67% |
1,866.67 |
$25,200.00 |
|
3 |
6.67% |
1,866.67 |
$23,333.33 |
|
4 |
6.67% |
1,866.67 |
$21,466.67 |
|
5 |
6.67% |
1,866.67 |
$19,600.00 |
|
6 |
6.67% |
1,866.67 |
$17,733.33 |
|
7 |
6.67% |
1,866.67 |
$15,866.67 |
|
8 |
6.67% |
1,866.67 |
$14,000.00 |
|
9 |
6.67% |
1,866.67 |
$12,133.33 |
|
10 |
6.67% |
1,866.67 |
$10,266.67 |
|
11 |
6.67% |
1,866.67 |
$8,400.00 |
|
12 |
6.67% |
1,866.67 |
$6,533.33 |
|
13 |
6.67% |
1,866.67 |
$4,666.67 |
|
14 |
6.67% |
1,866.67 |
$2,800.00 |
|
15 |
6.67% |
1,866.67 |
$933.34 |
|
16 |
3.33% |
933.33 |
$0.00 |
Michigan State University Extension recommends that you consult your tax professional and discuss options. This article gives an overview and example. Each farm situation is different and needs to be evaluated separately.
For more information on tax treatment of tile drainage systems, visit:
- Depreciation of Farm Drainage Tile, Bruce Clevenger, Ohio State University
- Depreciating Farm Drainage Tile, Neil Harl, Iowa State University
- Farmers Tax Guide (Publication 225), the Internal Revenue Service
- MACRS Calculator (Excel), FAST Tools by University of Illinois farmdoc
- Section 179 Direct Expense, the Internal Revenue Service
