When it comes to business expenses, farmers “would expense everything if they were given the chance,” according to CPA Claude Titche at Beene Garter in Grand Rapids.
The IRS, on the other hand, has never seen an expenditure it doesn’t want depreciated over five years, he added.
Those opposing viewpoints will collide on a lot of West Michigan farms as of Jan. 1, when new IRS regulations on personal property business expenses are supposed to take effect. The change specifically addresses expenses stemming from repair of equipment.
Titche, a tax partner at Beene Garter, works with a lot of farmers in West Michigan and understands why repair expenses are a big tax issue for them, although the new regulations pertain to all types of businesses, not just farmers.
In a nutshell, farmers often like to fix or build their own equipment and expense the cost, and now the IRS thinks some projects may be a capital expense that can only be depreciated over time.
Speaking to farmers, Titche said, “There is going to be extra analysis that has to be done to determine whether you can expense” the personal property repair cost in the same tax year, “or if you have to capitalize it” and depreciate the expense over five years.
Because of the climate here, many Michigan farmers who raise crops (as opposed to dairy farmers, who never have a slow season) like to spend part of the slow winter months building or renovating farm equipment — tractors, sprayers, cherry shakers, etc. On those projects, it’s common for them to expense each separate thing they buy. Some mechanically inclined farmers are even capable of turning an old worn-out piece of machinery into something above and beyond what it once was.
For years, said Titche, the IRS has questioned certain repair expenses — like farm equipment — insisting it should be depreciated over five years. Many times in the past, the courts have had to get involved and make the decisions on what gets expensed and what has to be depreciated, he noted.
Titche said the IRS maintains that some equipment repair projects are really major capital investments that should be “capitalized” and thus depreciated, so the IRS has added a new term to its business deductions: “a unit of property.”
A repair or renovation project in a highly skilled farmer’s workshop could result in a major piece of equipment, “and a lot of times, they expense the whole thing,” he said. “If they went to ABC Equipment Co., they would have paid a hundred grand (for the same type of machine) and they probably wouldn’t have had the guts to expense that,” he said, because the IRS would argue it was clearly a capital expense.
That “repaired” piece of machinery may be looked at by the IRS as a “unit of property,” as opposed to all the separate purchases the farmer made and wants to expense.
Titche said one thing about the impending Repair Regulations: Sorting it out likely will mean more work for the farmers’ CPAs.