Specialized Returns and Taxpayers · Farmers

Depreciation for farmers

Nothing about farm depreciation is exotic in method. What is different is which class an asset falls into, when the clock starts on something that will not produce for four years, and two provisions that let a farmer deduct at planting what everyone else would capitalise. Get the class right and the rest follows from the ordinary rules.

The rule

Machinery is five-year property (IRC § 168(e)(3)(B)(vii)). farm machinery and equipment other than a grain bin, cotton ginning asset, fence or other land improvement, used in a farming business as defined in IRC § 263A(e)(4) and whose original use commences with the taxpayer after 31 December 2017, is 5-year property (IRC § 168(e)(3)(B)(vii))^TY2026 Read the exclusions: a grain bin, a cotton ginning asset, a fence and any other land improvement are not in the five-year class and fall into their own classes under the class life tables.

Structures and orchards are ten-year property. 10-year property includes any single purpose agricultural or horticultural structure within the meaning of IRC § 168(i)(13) and any tree or vine bearing fruit or nuts (IRC § 168(e)(3)(D)(i), (ii))^TY2026 a single purpose agricultural or horticultural structure is one specifically designed, constructed and used for housing, raising and feeding a particular type of livestock and their produce, or for the commercial production of plants in a greenhouse; an enclosure providing work space qualifies only if that space is used solely for stockwork, for maintaining the enclosure and its equipment, or for maintaining or replacing the plants (IRC § 168(i)(13))^TY2026 The single purpose test is strict. A barn used for both livestock and equipment storage generally fails it, because the work space requirement in IRC § 168(i)(13) allows only stockwork, maintenance of the enclosure and its equipment, and maintenance or replacement of the plants.

The method. the general method is the 200 percent declining balance method with a switch to straight line in the first year that produces a larger allowance; 150 percent declining balance applies to 15-year and 20-year property, and the straight line method is required for nonresidential real property, residential rental property, railroad grading or tunnel bore, and any tree or vine bearing fruit or nuts (IRC § 168(b))^TY2026 Note the last item on the straight line list: a fruit- or nut-bearing tree or vine is depreciated straight line over ten years, not on a declining balance.

And the method changed. before 2018 IRC § 168(b)(2)(B) required the 150 percent declining balance method for any property used in a farming business; Pub. L. 115-97 § 13203(b) struck that subparagraph, so farm machinery placed in service after 2017 uses 200 percent declining balance like other property of its class^TY2026 That is the single most commonly mis-stated point in farm depreciation, because it reversed a rule that had stood since 1986.

The interest limitation has a depreciation cost. an electing farming business under IRC § 163(j)(7)(C), which escapes the business interest limitation, must use the alternative depreciation system for any property with a recovery period of 10 years or more — the straight line method without regard to salvage value, over the ADS recovery period (IRC § 168(g)(1)(G), (2))^TY2026 A farming business that elects out of the IRC § 163(j) interest limitation buys that relief with slower cost recovery on every asset with a recovery period of ten years or more — its barns, its orchards and its single purpose structures.

The election for orchards and vineyards. a taxpayer may elect, for a specified plant planted or grafted in the ordinary course of a farming business, a depreciation deduction equal to 100 percent of the plant’s adjusted basis in the year of planting or grafting, with the basis reduced accordingly; a specified plant is a tree or vine bearing fruits or nuts, or another plant yielding more than one crop with a pre-productive period generally over 2 years, and not one planted or grafted outside the United States (IRC § 168(k)(5)(A), (B))^TY2026 the specified plant election is revocable only with the Secretary’s consent, and a plant to which it applies is not treated as qualified property in the year it is placed in service — so the additional depreciation is claimed once, at planting, and not again at first bearing (IRC § 168(k)(5)(C), (D))^TY2026 This is the one provision that solves the orchard grower’s real problem, which is a four-to-seven year gap between planting and any income. Without it, the tree is not placed in service until it reaches a productive stage, so no depreciation runs during the wait.

Expensing. $2,560,000 — the aggregate cost of IRC § 179 property a taxpayer may elect to expense for a taxable year beginning in 2026^TY2026 $4,090,000 — the 2026 limitation is reduced, but not below zero, by the amount by which the cost of IRC § 179 property placed in service during the year exceeds this figure^TY2026 the deduction, after the dollar limitation and the phase-out, may not exceed the aggregate taxable income derived from the active conduct of any trade or business, computed without the IRC § 179 deduction itself; the disallowed amount carries forward^TY2026 100 percent of the adjusted basis of qualified property, with the basis reduced by that allowance before any other depreciation is computed^TY2026

Two farm-only expensing provisions. a taxpayer engaged in the business of farming may treat expenditures for soil or water conservation on land used in farming, for the prevention of erosion of such land, or for endangered species recovery as expenses not chargeable to capital account (IRC § 175(a))^TY2026 the IRC § 175 deduction may not exceed 25 percent of gross income derived from farming for the year; the excess carries forward indefinitely in order of time, subject to the same 25 percent ceiling in each later year (IRC § 175(b))^TY2026 a taxpayer engaged in the business of farming may elect to treat as expenses, rather than capitalise, expenditures for the purchase or acquisition of fertilizer, lime, ground limestone, marl or other materials to enrich, neutralise or condition land used in farming, and for applying them to that land (IRC § 180(a))^TY2026

Current figures

How it works in practice

Classify before computing, and classify by the statute rather than by appearance. A machine shed is not a single purpose agricultural structure and is not five-year property; it is a farm building falling under the class life tables at twenty years. A hog confinement barn designed and used only for hogs and their equipment is a single purpose livestock structure at ten years. A grain bin is excluded from the five-year machinery class by name and sits at seven. Three buildings on the same farm, three different recovery periods.

For an orchard or vineyard, decide on the IRC § 168(k)(5) election in the year of planting, because that is the only year it is available. Without it the trees are not placed in service until they reach a productive stage, and the pre-productive costs are capitalised under IRC § 263A unless the farm is inside the small business exception. With it, the whole basis is deducted at planting — and the plant is then excluded from qualified property treatment when it does come into bearing, so the choice cannot be made twice.

Weigh the IRC § 163(j)(7)(C) election carefully on a capital-intensive farm. Escaping the business interest limitation is attractive to an operation carrying land and equipment debt, but it forces the alternative depreciation system onto every asset with a ten-year or longer recovery period, and that election is irrevocable. Machinery in the five-year class is unaffected, so the cost falls entirely on structures, orchards and land improvements.

Use IRC § 175 and IRC § 180 for what they are: exceptions to capitalisation, not depreciation provisions. IRC § 175 covers earth-moving, terracing, drainage and similar conservation work that would otherwise be added to the basis of the land and never recovered at all, and it is capped at a quarter of gross farm income with an indefinite carryover. IRC § 180 covers fertilizer and soil conditioners whose benefit lasts more than a year, which is the only reason they would be capitalised in the first place.

How this has changed

Pub. L. 115-97 § 13203 made two changes at once for property placed in service after 31 December 2017: it created the five-year class for new farm machinery at IRC § 168(e)(3)(B)(vii), shortening the old seven-year period, and it repealed the 150 percent declining balance requirement for farm property. Both were significant accelerations, and the machinery class change applies only where the original use commences with the taxpayer, so used equipment stays at seven years.

The IRC § 168(k)(5) specified plant election came from the Protecting Americans from Tax Hikes Act of 2015 and was made permanent in substance by later legislation. It was the answer to a real structural problem: the placed-in-service rule for an orchard postponed every deduction until first bearing, which for almonds or walnuts could be seven years after the money was spent.

Bonus depreciation itself has moved repeatedly, and Pub. L. 119-21 § 70301 restored and made permanent the full rate while repealing the phase-down schedule at IRC § 168(k)(6) and (8). That matters for farms because equipment purchases are lumpy and the phase-down had been driving purchase timing.

The small business exceptions have done more for farm accounting than any change to depreciation. A farm inside the IRC § 448(c) gross receipts threshold escapes IRC § 263A entirely, so the pre-productive period capitalisation rules that once made orchard accounting painful now apply to a small minority of operations.

Exam focus

Know the three farm classes and what falls outside them: five-year for new machinery and equipment excluding grain bins, cotton ginning assets, fences and land improvements; ten-year for single purpose agricultural or horticultural structures and for fruit- or nut-bearing trees and vines; twenty years for a general purpose farm building.

Know that the 150 percent declining balance requirement for farm property is gone, and that trees and vines are nonetheless on straight line.

Know the IRC § 168(k)(5) election — what a specified plant is, that the deduction comes at planting or grafting, and that the plant is then excluded from qualified property treatment when placed in service. Know that IRC § 175 is capped at 25 percent of gross farm income with a carryover, and that IRC § 180 covers fertilizer and lime.

Check yourself

1. A farmer buys a used combine in 2026 for $190,000. What is its recovery period?

Answer: Seven years. IRC § 168(e)(3)(B)(vii) puts farm machinery in the five-year class only where “the original use of which commences with the taxpayer” — that is, new equipment. A used combine falls back on its class life, which puts it at seven years. The distinction between new and used matters here in a way it no longer does for bonus depreciation.

2. A dairy builds a milking parlour designed and used solely for milking and for housing the milking equipment. What class and method?

Answer: Ten-year property under IRC § 168(e)(3)(D)(i) as a single purpose livestock structure, and 200 percent declining balance with a switch to straight line under IRC § 168(b)(1). The straight line requirement in IRC § 168(b)(3) reaches trees and vines and real property classes, not single purpose structures.

3. A grower elects IRC § 168(k)(5) for a vineyard planted in 2026 and deducts the full basis. The vines first bear in 2030. May bonus depreciation be claimed in 2030?

Answer: No. IRC § 168(k)(5)(D) provides that a specified plant to which the paragraph applies is not treated as qualified property in the taxable year in which it is placed in service. The additional depreciation is claimed once, at planting, and there is nothing left to claim in 2030 — the adjusted basis has already been reduced to zero.

4. A farm with $200,000 of gross farm income spends $70,000 on drainage work qualifying under IRC § 175. How much is deductible this year?

Answer: $50,000. The IRC § 175(b) ceiling is 25 percent of gross income derived from farming, so $50,000. The remaining $20,000 carries forward and is deductible in succeeding years in order of time, subject to the same 25 percent ceiling in each of them, and with no expiry.

5. A farming business elects out of the IRC § 163(j) interest limitation. It owns a fleet of five-year machinery and a ten-year single purpose hog barn. What changes?

Answer: Only the barn. IRC § 168(g)(1)(G) puts property with a recovery period of ten years or more held by an electing farming business onto the alternative depreciation system — straight line over the ADS period. The five-year machinery is unaffected and continues on ordinary MACRS. The election is irrevocable, so the cost runs for the life of every long-lived asset the farm owns or later acquires.