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Agricultural Cost Segregation Studies: Accelerated Depreciation for Tax Savings

Agricultural Cost Segregation Studies are a smart tax move for farmers and ranchers here in the Sacramento Valley, agricultural center of California. And it’s about time: Although cost segregation studies have been available for decades, they’ve only recently hit the mainstream. Agriculture business folks in Northern California are realizing what a great benefit these studies can be to their bottom line.

The general concept of Cost Segregation Studies, in which personal property-such as removable flooring, plumbing and electrical components connected to personal property-are segregated from the real property of foundations, walls and other structural components, works well for properties such as office complexes, apartment buildings, single-family rental units, manufacturing plants or shopping malls.

Agricultural Cost Segregation Studies, though, need a broader view. When preparing a Cost Segregation Study for farmers and ranchers, we need to look at far more than constructed buildings; we must also consider the ranch and farm land itself and all the improvements made to the property for the purposes of farming or ranching.

Of course, the land itself cannot be depreciated. But certain site improvements to the land can be: road coverings, for instance, if they’ve been privately built; pumps and wells; fences and gates; irrigation installations; and electrical wiring. And, in some cases, dams, ponds, and terraces. Most of the agricultural cost segregation study possibilities are spelled out clearly in IRS Publication 225, Farmer’s Tax Guide, which devotes nearly 3 full pages to Depreciation, Depletion, and Amortization.

The section “What Property Can Be Depreciated?” answers itself with 3 sub-heads:

  • Property You Own
  • Property Used in Your Business or Income-Producing Activity
  • Property Having a Determinable Useful Life

That last, the Determinable Useful Life, is where a recent Cost Segregation Study for a Yuba City rice farm got interesting. As anyone who owns a rice farm, works on a rice farm, has visited or even driven by a rice farm knows, a great deal of rice farming includes earthen dams and terraces. Sure would be nice if they could be depreciated, wouldn’t it? Here’s what the IRS says about such structures:

Dams, ponds, and terraces. In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determined useful life.

Well, when I see the phrase “in general, you cannot” that just makes me wonder when specifically you can. So I rolled up my sleeves and dug into the IRS publications pertaining to agricultural depreciation. Turns out that 26 CFR 1.175-2, Code of Federal Regulations – Title 26: Internal Revenue Service, which defines soil and water conservation expenditures, provides guidance for such depreciation:

More specifically, a farmer may deduct expenditures made for these purposes [soil and water conservation in respect of land used in farming, or for the prevention of erosion of land used in farming, but only if such expenditures are made in the furtherance of the business of farming] which are for (i) the treatment or moving of earth, (ii) the construction, control, and protection of diversion channels, drainage ditches, irrigation ditches, earthen dams, watercourses, outlets, and ponds, (iii) the eradication of brush, and (iv) the planting of windbreaks. Expenditures for the treatment or moving of earth include but are not limited to expenditures for leveling, conditioning, grading, terracing, contour furrowing, and restoration of soil fertility.

That’s the kind of information an agricultural cost segregation study specialist-especially one in the Sacramento Valley!-likes to uncover. With these specifics, we can help our rice farming cost segregation study client realize an increased tax savings by putting together a Quality Cost Segregation Study that includes accelerated depreciation not only for his office buildings, machinery facilities and storage silos, roads, pumps and wells, fences and gates, and electrical wiring, but also “diversion channels, drainage ditches, irrigation ditches, earthen dams, watercourses, outlets, and ponds.”

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