Farmers generally report the expense to repair or maintain machinery, equipment, and buildings on Line 25, Schedule F. If the cost is instead for a betterment to the property, a restoration of the property, or an adaptation to a new use, the expense is not deductible on line 25. Instead, the farmer must usually capitalize the cost of the improvement (add it to the basis) and depreciate or expense the cost over the life of the asset.
Note: The Tangible Property Regulations provide a safe harbor under which farmers may choose to presently deduct, instead of capitalize, the cost of acquiring or producing certain tangible property. Treas. Reg.§ 1.263(a)-1 If farmers make the de minimis safe harbor election, they need not determine whether every small dollar expenditure for the acquisition of property is properly deductible or capitalized under the complex acquisition and improvement rules of the regulations. Instead, the taxpayer must deduct every purchase up to the amount of the safe harbor elected. For farmers without an applicable financial statement, the maximum amount of the safe harbor is $2,500. Farmers with an accounting procedure in place to expense such amounts can make an annual election. Farmers report expenses deducted under the safe harbor on line 32, Schedule F.
Example 1. Bob performs routine maintenance on his tractors, combines, heavy-duty trucks and pickups based on the manufacturer's recommended service intervals. This maintenance includes fluid changes (oil, antifreeze, and hydraulic oil), filter changes, and greasing articulating parts. This year Bob’s maintenance costs were $10,000. Bob uses Line 25, Schedule F to report and deduct this expense.
Example 2. Alecia operates a greenhouse in which she grows tropical plants. The compressor and fan motor failed in the greenhouse. Alecia pays an HVAC company $2,500 to replace the compressor and fan motor. This is a repair to the environmental system that allows Alecia to produce the unusual tropical plants. She uses Line 25, Schedule F to report and deduct this repair expense.
Example 3. Armando purchases an old set of grain bins and scales which are adjacent to his farm. Before he can use the grain bins, he must put new flighting in the augers which move grain from one bin to another, additionally, most of the roofing panels have pin holes allowing moisture and insects to enter the bin. Armando decides to replace all of the roof panels. The scales need to have new dampers installed so that trucks do not override the weighing arms. Armando spends $45,000 to bring the grain bins and scales back into service. This is an example of a restoration that must occur before the units can be placed into service. As such, the $45,000 is capitalized and added to basis of the grain bins and scales. Armando, with the help of his tax preparer, can make depreciation decisions with respect to the assets purchased in the restoration.
Example 4. Jasmine operates an herb farm. She has a shed in which she sorts, grades, and prepares the various herbs for sale. This year she replaces 25 percent of the roofing sheet metal and two of six windows at a cost of $12,000. Additionally, she creates a space for cool storage by installing two walls, a ceiling, and an access door, and 12 inches of insulation to encompass the cool storage room. Jasmine spends $15,000 on the cool room. Jasmine may deduct the $12,000 as a repair expense because only a portion of the roofing and windows were replaced compared to the total. She uses Line 25, Schedule F to report and deduct this expense.
Jasmine must capitalize the $15,000 she spent to construct the cool storage area because this is a new use of the shed space. She will recover this cost through depreciation.
Example 5. Theodore operates a large crop farm. During the tillage and planting season in the spring, a temperature gauge on one of Theodore’s tractors malfunctioned causing the tractor to overheat and the engine to seize. Theodore spent $25,000 to replace the engine and return the 5-year-old tractor to service. Two arguments might be made regarding this expense. First, this is a repair, which occurred just outside of the manufacturer's warranty but before the tractor was fully depreciated over its 7-year recovery period. The value of the tractor ($150,000) was not greatly enhanced with the replacement of the engine as the tractor’s value returned to a 3 percent marginally higher value. The engine replacement was 16.67% of the tractor’s value. Under this approach, Theodore would deduct the expense for the new engine on Line 25, Schedule F.
A second, more conservative position is to consider the new engine a “betterment” and capitalize the $25,000 cost. Theodore could then use Section 179 or bonus depreciation to recover the cost in full if the expense occurred before December 31, 2022.
Example 6. Using the fact pattern from Example 5, if the tractor was eleven years old instead of five, its adjusted tax basis (ATB) would be zero as the tractor’s cost would have been fully recovered. Now, it may be argued that the $25,000 Theodore spends on a new engine is a “restorative cost,” which places the tractor “back into service.” The cost would then be capitalized and depreciated or expensed under section 179.
The Center for Agricultural Law and Taxation is a partner of the National Agricultural Law Center (NALC) at the University of Arkansas System Division of Agriculture, which serves as the nation’s leading source of agricultural and food law research and information. This material is provided as part of that partnership and is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.