How to Depreciate a Farm Tractor on Income Tax

If you place a piece of equipment into service in a business, you may not be able to deduct the full cost of the equipment in the first year. Instead, most business equipment is considered a capital investment. Whether you are depreciating tractors, trucks, computers or even livestock, you must take deductions for depreciation gradually over the expected useful life of the property.

Determine the recovery period under MACRS rules. MACRS stands for Modified Accelerated Cost Recovery System. These rules define the manner and rate at which you must depreciate capital equipment. The IRS details these rules in Publication 946 – How to Depreciate Property. In most cases, tractors are considered four-year property, just like light-duty trucks. Heavy general purpose trucks are considered six-year property.

Consider Section 179. This is a section of the tax code that allows businesses to deduct 100 percent of the purchase price of capital equipment in the first year, on up to $1 million of property. You cannot choose this method, however, unless your business has generated more profit than the price of the tractor. You cannot take a Section 179 deduction if you have an operating loss, since there is no income to take the deduction against. You don't have to use the tractor for the entirety of the tax year to take the deduction. Even if you purchased it and used it only a few months, it qualifies.

Download from IRS.gov and fill out a Schedule C if you are a sole proprietor, plus a Form 1040, or a Form 1120 or 1120S if you are a C corporation or an S corporation, respectively.

Fill out IRS Form 4562, Depreciation and Amortization. If you qualify for and elect to deduct the whole tractor under Section 179 rules, it's simple. If not, you must select a method of depreciation. If you are short on working capital, use an accelerated method of deduction, such as the 150 percent rate election or 200 percent declining balance method. If you don't need the capital, select the straight line depreciation method, which depreciates your tractor evenly over four years. However, if you anticipate operating losses in the early years of your business, you may want to use the straight line method to maximize the number of dollars you can depreciate when your business is actually profitable.