How to Deduct Tractors as a Farm Expense

Farmers can deduct tractors from their taxes.

It should go without saying, before you purchase a tractor for your farm, do some research. Not only do you want to get the best priced tractor for your business, you want to make sure that you purchase the equipment from the proper person. Otherwise, you may not be able to deduct the tractor from your taxes. As of 2011, the full price of the tractor may be deducted at once as long as the price is less than $500,000. To deduct a tractor from your taxes fill out the Schedule 179 Deduction form.

Step 1

Purchase your tractor. If your tractor is a gift or was inherited, it does not qualify as a deduction. Purchase of a tractor from a spouse, parent or offspring is not considered a qualifying purchase. Keep all receipts that pertain to the tractor.

Step 2

Prove that your farm is a business and not a hobby. If your farm fails to sell products such as crops, livestock, the IRS may deem your farm a hobby and not a business. The IRS does not allow deductions for a hobby; two-thirds of your income must come from farming to qualify as a business.

Step 3

Determine how much money you can deduct for your tractor. As of 2011, you can deduct up to $500,000 for farm equipment under Section 179 of the IRS code. You can only take a 179 deduction the year you put the tractor into service. If your total farm equipment purchases for one year total $2 million or more, you do not qualify for the Section 179 deduction. However, your tractor will qualify for depreciation. For example, if your tractor cost $600,000, you could deduct $500,000 and the remaining $100,000 could be claimed as depreciation. This only qualifies the first year the tractor was put into service.

Step 4

Download 1040 (Schedule F) and form 4562 (Depreciation and Amortization) from the IRS website. Fill out all forms according to directions. Section 1 of Form 4562 includes Section 179 Deduction.

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