1. Cost Segregation Depreciation for Poultry Houses Robert Page, CPA Regional Extension Agent II Alabama Cooperative Extension System

2. Depreciation is an allowance for expensing capital property and equipment over time. In this presentation, we are focusing on tax depreciation of capital assets for poultry farmers in their first year of operations.

3. IRS Approved Depreciation Methods Straight Line Declining Balance Sum-of-the-years digits Income forecast. Farmers generally use Modified Accelerated Cost Recovery System (MACRS) depreciation, which is a declining balance method generally expensing farm assets over 3, 5, 7 or 10 years.

4. Poultry House Depreciation Issues Expensive construction costs – mega houses nearing $500,000 each to build in Alabama, including house and equipment. Poultry equipment has different expected useful lives than poultry house.

5. Cost Segregation Studies The primary goal of a cost segregation study is to identify all construction – related costs that can be depreciated over a shorter tax life (5,7 and 15 years) than the building (39 years for non-residential real property)

6. Who can do a cost segregation study? Outside company such as CPA firms or consulting companies. These studies can cost thousands of dollars. Alternatively, individual poultry farmers can do their own study based on engineering blue prints or construction plans to assign costs to equipment. IRS audit guide on cost segregation says there are no standards for cost segregation studies.

7. What information should be in cost segregation study? Classify assets into property classes, such as land, land improvements, buildings, equipment, furniture and fixtures. Explain the rationale for classifying assets, such as useful life of equipment or expected usage. Substantiate the cost basis of each asset and reconcile total allocated costs to total actual costs.

8. Cost segregation studies work best with a newly constructed house and first poultry tax return Farmer has all blueprints, plans and construction contracts from vendors. Farmer can analyze invoices for equipment and construction for accurate costs. Farmer can verify that individual invoices match up to total house(s) cost.

9. Simple Cost Allocation Total Construction Cost per lender is $500,000. Total House Cost – 40% or $200,000 Total Equipment Cost – 60% of $300,000 Farmer verifies that all construction documentation equals $500,000. Farmer then allocates costs to different house or equipment classes.

10. Simple Cost Allocation Example Classify property classes: Land – non-depreciable Land improvements – depreciate over 15 years Buildings – separate into components, such as pad, framing and wiring systems for 5,7,15 or 29 years. Equipment - separate based on vendor invoices and use for 5, 7, 15 years.

11. Completed Cost Segregation Report Farmers will complete a spreadsheet in excel or handwritten analysis. Farmer may allocate total $500,000 cost into 5-10 total lines or may detail components into 50 lines. Each line will have component description, expected life, allocated cost and reference to blueprint or vendor invoice for IRS audit verification.

12. Working with Tax Preparer on Cost Segregation Report Farmer should develop cost segregation spreadsheet with construction documentation, typically in year of construction. If farmer cannot do spreadsheet, tax preparer can do it for them. Tax preparer should spend time with farmer explaining how depreciation decisions, loan repayments and expected upgrades or repairs can dramatically impact farmer’s cash flow. Poultry farmers should expect first year poultry tax return cost to be significant due to tax preparers work on cost segregation report and more elaborate deprecation schedule for new poultry operations. (Note: This will not be a $150 tax return.)

13. Educating Alabama First Year Poultry Farmers on Depreciation In Alabama, there is no ongoing Farm Analysis program, but new Farm and Agribusiness Management REAs (4 statewide) can help set up spreadsheet for selected farms. Alabama Farm and Agribusiness Management REAs can write fact sheet with samples and develop on-line presentation to educate poultry farmers. Alabama Farm and Agribusiness Management REAs will have 8 two-hour Farm Tax Seminars to review common farm tax issues, including deprecation and cash flow issues in October and November, 2016. These seminars will be in addition to the 16 hour AU Annual Tax Schools for CPAs and EAs across the state.

14. Questions? Robert L. Page, CPA Regional Extension Agent II Farm & Agribusiness Management Team Alabama Cooperative Extension System Email: rlp0005@aces.edu.rlp0005@aces.edu Office: 256-528-7133