Equipment depreciation guidelines.

TerryinMD · Mar 4, 2002

It's that favorite time of year - tax season. Where we are the hunted instead of the hunters. /w3tcompact/icons/wink.gif

I have read the IRS guides in trying to figure out what I need to do to depreciate my equipment. Pages and pages of double speak and Enronese-like terms (read the stuff a few days ago and my head still hurts. /w3tcompact/icons/shocked.gif)

Do any of the TBN brain trust have some alternative sites, book references, etc to help or poor taxpayer try and figure out this mess.

Or should I throw in the towel and have someone do this for me?

Terry

PaulinSD · Mar 4, 2002

I depreciate my equipment over 5 years. The small $ items, like a $500 3 point mower, I take it as an expence. Saves a lot of worthless paperwork year after year.

Paul

cowboydoc · Mar 4, 2002

Terry,
Depending on the equipment you have to depreciate it out over 5-7 years. NOW THOUGH a little bit of good news. If you have a piece of equipment that you bought that is less than I believe around $18,000 you can take all of the deduction in the current tax year. Back before things got way too complicated I used to do all my own taxes. I found that the tax programs were invaluabe in doing my own taxes. Most had tutorials of depreciation and the like. I learned alot just from them. Also I used to get a book every year from American Express that was really good as well that went over all the tax issues.

hayden · Mar 4, 2002

Right, there's a provision for taking an accelerated one year depreciation up to a certain limit ($18k was suggested - I don't know the exact number) I did this with a portion of my equipment as used for timber management which is a for-profit operation.

TerryinMD · Mar 5, 2002

Paul/CBD/Hayden,

Thanks for the input. I'm using Taxcut and have not gotten that far into figuring any depreciation. Trying to get a basic understanding before jumping in head first. Read the IRS guidelines, my head tilted to one side, and the drool started to run... kinda went into a comatose state. /w3tcompact/icons/wink.gif So, I figured that a bunch of you guys have gone through this exercise and, well, just put forth a question and see what happens...

Again, thanks a bunch.

Terry

cowboydoc · Mar 5, 2002

Terry,
The other nice thing was the one that I used also went over my tax return at the end and told me where possible red flags for audits were as well. Does the one you're using take you step by step and give you options of doing it different ways to see the outcome?

TerryinMD · Mar 5, 2002

CBD,

Yes, Taxcut walks you through the tax preparation by asking questions. The next step is based upon the answers to questions. The software developers try to make the product easy to use, but sometimes do not provide good help information on esoteric and arcane accounting methodologies such as depreciation and expensing for businesses. We're new to the game and I want to make sure that our friendly IRS bureaucrats stay in their office and not knocking on my door. /w3tcompact/icons/blush.gif

I have used both TurboTax and Taxcut. Too be honest, the applications are very close in their approach on usability.

I used Turbotax/MacInTax for nearly 10 years before switching over to Taxcut. The reason - my wife. She got a free copy of the package and I decided what the heck. It did the job and was able to import my previous years TurboTax information.

Terry

cowboydoc · Mar 5, 2002

Terry,
A friend just sent me this. I guess it's $24k now in current year depreciation. I know this has to do with horses but it's all the same just different product.

Did you know that in the year 2001 you can expense off up to $24,000 of depreciable assets bought in the current year if you meet all of the criteria.
Read about this and other deductions in books from Davis Publishing. Check out our web-site at
www.horse-books.com to find out more.

Eileen Davis
Davis Publishing
Equine Author/Appraiser/Tax Consultant

stmiller2 · Mar 5, 2002

Section 179 allows you to expense up to $24,000 of qualifying assets (equipment, etc.) for the 2001 tax year.

TerryinMD · Mar 5, 2002

Wow - this is getting better and better.... /w3tcompact/icons/smile.gif

Terry

unaka · Mar 5, 2002

I took advantage of this section 179 this year. In 2001 I purchased a MF 263 2wd and several implements. My wife uses Turbo Tax and told me about this new section 179. We researched it and everything we could find said we should take advantage of it. With the price of the tractor and implements, we were able to take the whole $24k loss, resulting in a nice refund. I took that refund, went back to the dealer, and upgraded to a MF 4wd 243. It was delivered yesterday (pictures will be forthcoming). According to a CPA I talked with, we might be triggered for an audit for taking such a loss, but we keep good records and his advice was to stand our ground.

Unaka

TerryinMD · Mar 5, 2002

unaka,

Cool... I like it.

Now, when you talk about keeping good records. What does that mean? A spreadsheet showing the date of purchase and what you spent. Or are they detailed as to what, where, and when you used the equipment?

That is another detail I failed to mention on my original post. To what length does one need to go to keepeth the taxman away....

Terry

MikePA · Mar 5, 2002

To depreciate an asset, don't you have to be a business? I recall reading that if your business doesn't show a profit in x number of years, it's considered a hobby?

cowboydoc · Mar 5, 2002

Mike and Terry,
Yes you do have to have a legitimate business to take deductions. As far as records go you need to have a detailed business plan that says exactly what you are going to do to make a profit. Then you need to have a marketing plan, etc. That's where all the paperwork comes in. Then you have to actually have some business! We talked about this awhile ago on here and for the most part unless you are seriously doing this as a business you're better off to do things under the table.

MikePA · Mar 5, 2002

doc,

That's what I thought. I had this vision (nightmare) of people taking deductions then being declared a hobby and having to pay them back. Not a pretty sight. /w3tcompact/icons/sad.gif

unaka · Mar 5, 2002

Terry,

I'll preface my comments by saying I'm no tax expert, but I (me and my wife) have always done my own taxes and have learned a few things along the way.

When the IRS is examining a significant business loss (like the one I just took), and they mark someone for an audit, they will be looking to see if you really run a "business" or simply have an expensive "hobby". I keep records of every ( I mean EVERY ) expenditure I make that has anything to do with my cattle. This is everything from feed to fencing materials. I have a notebook where I write mileage to and from the feedstore. I keep records of each cow, her offspring, birthweight, and notes on birthing ease, or difficulty, and so on. I could go on, but my point is that if you're deducting expenses for a business, you'd better be keeping good records and "acting" like a business, otherwise the IRS will deem your "business" as nothing more than a glorified hobby.

Unaka

TerryinMD · Mar 5, 2002

Now this is getting more interesting....

We do not have a formal business plan but have been reporting income from our market garden for a few years. My wife has a EIC. We bought the tractor and equipment this past year to increase our productivity and maintain the property for the market garden. We keep records of all expenditures for the business. So, I guess we're doing what we need to do.

So I guess step one is to define a business plan. Step two has been in effect for a while (selling goods and making money).

Hmmm.... need to do a little more research. /w3tcompact/icons/eyes.gif

Terry

cowboydoc · Mar 5, 2002

Terry,
If you get audited you will stand a significantly better chance of winning if you have a business plan. When deciding on business or hobby they go by amt. of hours worked on the business per week, etc. Also like was said if you're declaing losses year after year you better have a business plan in effect on how you are going to become profitable in the future. Unaka is doing it right. He keeps track of all expenses and details of his business. I would assume he probably culls out bad cows and experiments with different ones for birthweights and selling weights. This is what they want to see. That you are actively trying to make a go of the business and become profitable. Without a business plan in writing you are going to have a tough time proving to the IRS why you took all those deductions.

For example this last year I reached a pretty high profit, esp. with the cattle. That's why I invested in new hay equipment and land. I wrote up a business plan on how I could raise profitability even more by raising more of my own hay and increasing my herd and less dependence on outside sources for feed. Then on the horse end I wrote in my plan that the profitability of rope horses was on the decline and the profitablility of reining horses was on the upward trend. I used several research articles to back this up and referenced them in my plan. With this in mind I sold four of my roping bred broodmares and bought the new stud and some new reining bred broodmares. Now I am back to operating at a loss again but with a plan to become even more profitable at the end of the next four years. Now if I ever get audited I've got a sound plan for why I invested the way that I did and switched directions from my previous business plan.

TerryinMD · Mar 5, 2002

This makes sense.... now I understand the why's of the business plan. I mistakenly thought that they were for startup businesses to present to financiers to acquire funding. Ahhhh... it's a gubmint thing... /w3tcompact/icons/eyes.gif

Again, thanks for the info....

Terry

Anonymous Poster · Mar 5, 2002

<font color=blue>...if your business doesn't show a profit in x number of years, it's considered a hobby? ...</font color=blue>

So... Thats it!... I've been doing a hobby all these years....? /w3tcompact/icons/wink.gif