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Discussion Starter #1
I would truly appreciate an explanation with clear examples. I have been trying to figure this out without much luck. This is only for farmers that own farms. I do not own a farm, but I would like a knowledgeable person to answer this as this forum seems to have many educated members with accountants. I was surprised I couldn't find a clear example by searching the web.

If a person that owns a farm and is able to depreciate out an asset, in this case a truck, how much would they save on taxes with only the truck as an example.

For example, if a person purchases a truck for 40k to use on a farm, and is able to depreciate out this asset for farm use say five years, and is in the 25% tax bracket would they save 25% of 40k on their taxes?

In this example, would they reduce their income taxes by 10K total over a five year period? Assuming only the truck, can they get a tax refund assuming no taxes owed either way before this deduction? Or is it only to reduce liability on taxes? Or does it work very differently than from the way I think it does?

Please, no "they shouldn't be allowed or who farms or this is bull" or anything else off topic, just a straight forward answer to my question from a person that actually understands a farmer's deduction from purchasing a truck used in a farm.
 

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It's not that simple...You didn't state if they had used Section 179 to handle the depreciation of the truck...:)

You can read about section 179 here... https://www.irs.gov/publications/p225/ch07.html#en_US_2015_publink1000218173

If you are NOT using Section 179...then The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions.

Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.

You must use ADS for the following property.
All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect.

Listed property used 50% or less in a qualified business use. See Additional Rules for Listed Property , later.

Any tax-exempt use property.

Any tax-exempt bond-financed property.

Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts.

Any tangible property used predominantly outside the United States during the year.

CAUTION:
If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance.
Electing ADS. Although your property may qualify for GDS, you can elect to use ADS. The election generally must cover all property in the same property class you placed in service during the year. However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Once you make this election, you can never revoke it.

Under GDS...
The following is a list of the nine property classes under GDS.

3-year property.

5-year property.

7-year property.

10-year property.

15-year property.

20-year property.

25-year property.

Residential rental property.

Nonresidential real property.

See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class.

And now it gets complicated...:)

Recovery Period in Years
Assets..........................................................................GDS ADS
Truck (heavy duty, unloaded weight 13,000 lbs. or more).......5 6
Truck (actual weight less than 13,000 lbs)............................5 5

Oh...and this is just the Feds...your state tax system for dealing with depreciation for farms might be slightly different...

This is why I have a CPA to grind through all this crap...I buy the trucks I want and let her sort through all this stuff for the feds...:rolleyes:

And then there is RECAPTURE!!!...this is about the time my eyes start to glaze over, because recapture varies depending on the form of depreciation elected...:)
 

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Discussion Starter #3
Actually, I had found that and it was as clear as mud. That is why I wanted a clear example ;) I appreciate the link though even though I had already found that. I don't think most farmers would use the 179, but depreciate it out over five years. Still looking for an answer here, thanks though.
 

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I haven't done the accounting myself, but according to my friends who are farmers and ranchers, it's not a tax deduction but rather a business expense. So, if you make $100,000 in a year, you can claim a portion of the amount the vehicle depreciated as a business expense to offset your income (e.g., it's as though you only made $90,000 instead of $100,000). You get to amortize that depreciation over time, so you won't see the deduction all at once. At least, that's my understanding of it. If there is an additional tax rebate, I am not aware of it.
 

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Actually, I had found that and it was as clear as mud. That is why I wanted a clear example ;) I appreciate the link though even though I had already found that. I don't think most farmers would use the 179, but depreciate it out over five years. Still looking for an answer here, thanks though.
Actually we use Section 179 quite often...especially for LARGE purchases so you get immediate cash back into the operation...:)

Section 179 Deduction: Until further notice, Section 179 is permanent at the $500,000 level. Businesses exceeding a total of $2 million of purchases in qualifying equipment have the Section 179 deduction phase-out dollar-for-dollar and completely eliminated above $2.5 million. Additionally, the Section 179 cap will be indexed to inflation in $10,000 increments in future years.
50% Bonus Depreciation will be extended through 2019. Businesses of all sizes will be able to depreciate 50 percent of the cost of equipment acquired and put in service during 2015, 2016 and 2017. Then bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.


If you doubt that, check out an entire site dedicated to it...:)

http://www.section179.org

There is the section dedicated to vehicles... http://www.section179.org/section_179_vehicle_deductions.html
 

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Discussion Starter #6
I don't doubt it all. I am just curious if I understand this correctly or at all. Most farmers where I live in rural Kentucky are small time farmers. I am just trying to understand this better.
 

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I don't doubt it all. I am just curious if I understand this correctly or at all. Most farmers where I live in rural Kentucky are small time farmers. I am just trying to understand this better.
Unfortunately, most small farmers do NOT use the tax code to their advantage...:(

The only real way to understand this better is to either sit down with a CPA that does farm accounts or take a BUNCH of accounting classes...or do A LOT of reading on your own...:)
 

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Discussion Starter #8
Unfortunately, most small farmers do NOT use the tax code to their advantage...:(

The only real way to understand this better is to either sit down with a CPA that does farm accounts or take a BUNCH of accounting classes...or do A LOT of reading on your own...:)
I have done a lot of reading, and I came up with what I have above; however, I am just curious if I am right.

Would a 40k truck purchased for farm work, save a farmer 10k in the 25% tax bracket?

Personally, I dunno, but I would appreciate someone explaining it to me that does. The 10k in savings doesn't matter to me whether it is over 1 year or five years. I would just like to know if it depends on your tax bracket and if that is what it is based on. For example, assuming I am correct, I that person was in a 30% tax bracket, would that 10K turn into 12K because of each person's tax brackets. I have learned a lot by doing my own taxes with Turbo Tax over the years. I would just like to understand this better. I thought this forum might be a good place to ask this as it seems we do have accountants that visit this forum regularly.
 

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We used this method for Ag expenses on a 1T Dodge pickup and 8T Dump Truck. Both have farm tags and are used as such. You also need to be careful about personal vs. buisness when claiming operating expenses on these vehicles (tires, gas, etc). Also, because of large-scale abuse (buying Hummers and Model X's), the ability to claim vehicles is now limited. $25,000 max I believe.

If I understand it correctly, this the only difference here is spreading the cost over multiple years vs. one -and- only matters if you have a high salary job and operate your ranch as a sole proprietorship (most likely for hobby farms) - or if your farm/ranch generates a lot of taxable income (which is very unlikely).

A little off-topic: I sure wish we had a simpler tax code. It's a full-time job to keep up with all the updates and such.
 

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I have done a lot of reading, and I came up with what I have above; however, I am just curious if I am right.

Would a 40k truck purchased for farm work, save a farmer 10k in the 25% tax bracket?

Personally, I dunno, but I would appreciate someone explaining it to me that does. The 10k in savings doesn't matter to me whether it is over 1 year or five years. I would just like to know if it depends on your tax bracket and if that is what it is based on. For example, assuming I am correct, I that person was in a 30% tax bracket, would that 10K turn into 12K because of each person's tax brackets. I have learned a lot by doing my own taxes with Turbo Tax over the years. I would just like to understand this better. I thought this forum might be a good place to ask this as it seems we do have accountants that visit this forum regularly.
You are confusing tax brackets and depreciation of an asset...the depreciation of the asset is related to the value of the asset NOT the tax payers bracket...the only time the bracket comes into play is if you had enough depreciation to not have made any taxable income...which opens a whole new set of questions and answers...:)

My CPA pointed out you might like to read their profession's take on Section 179 when it comes to vehicles...
http://www.cpapracticeadvisor.com/news/11231983/dont-forget-the-tax-breaks-for-suvs-trucks-and-vans


The other thing I just discovered by talking with her is that the size of the truck bed matters...:rolleyes:

Here is the scenario that was hypothesized...
I'm an LLC sole proprietor independent consultant. I travel twice every month to my client site (via plane). I am thinking of purchasing a pickup truck (over 6K lbs) and benefiting from a section 179 deduction. Likely I will use this truck only to drive to the airport and client meetings for business and don't expect to put more than 3K or so miles this year-with no personal use for first year and maybe second. I understand that under section 179 I can deduct $25K of the cost ($38K) + expenses. What about year 2? Can I deduct the remaining depreciation? What is the useful life of the vehicle per IRS and when can I use it just as a personal vehicle without penalty and will I then be able to purchase another vehicle the same way? .

If the pickup has a 6 foot bed, you can use Section 179 for the full amount. If it's less than that, the non-section 179 amount is spread out over 6 years (including the first year).

If your business percentage falls to 50% or less in the first 6 years, you will need to recapture the Section 179 depreciation.

Whenever you sell the vehicle, you will pay taxes on it. It won't matter if it's still a business vehicle or a personal vehicle. If you use Section 179 for the entire amount (or it is fully depreciated), the FULL sales price of the vehicle will be taxable.

As faithful as that rusty old truck has been, at some point the company will want to get rid of it. When it does, it compares the proceeds from the sale -- or the disposal cost -- with the book value of the asset and reports either a gain or a loss. Say the fully depreciated truck has a book value of zero. If the company sells the truck for $1,500, it reports a gain of $1,500 on the sale. If it has to pay $100 to get a junkyard to take it, the company reports a $100 loss. Now say the truck has been fully depreciated to a salvage value of $1,000. If the company sells the truck for $1,500, it reports a $500 gain. If it has to pay a junkyard $100 to take it, it reports a $900 loss....as you can see in the preceding...you can depreciate to a book value/salvage value/et cetera...:)

This is why I use a CPA...:rolleyes:
 

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Discussion Starter #11 (Edited)
You are confusing tax brackets and depreciation of an asset...the depreciation of the asset is related to the value of the asset NOT the tax payers bracket...the only time the bracket comes into play is if you had enough depreciation to not have made any taxable income...which opens a whole new set of questions and answers...:)

My CPA pointed out you might like to read their profession's take on Section 179 when it comes to vehicles...
http://www.cpapracticeadvisor.com/news/11231983/dont-forget-the-tax-breaks-for-suvs-trucks-and-vans


The other thing I just discovered by talking with her is that the size of the truck bed matters...:rolleyes:

Here is the scenario that was hypothesized...
I'm an LLC sole proprietor independent consultant. I travel twice every month to my client site (via plane). I am thinking of purchasing a pickup truck (over 6K lbs) and benefiting from a section 179 deduction. Likely I will use this truck only to drive to the airport and client meetings for business and don't expect to put more than 3K or so miles this year-with no personal use for first year and maybe second. I understand that under section 179 I can deduct $25K of the cost ($38K) + expenses. What about year 2? Can I deduct the remaining depreciation? What is the useful life of the vehicle per IRS and when can I use it just as a personal vehicle without penalty and will I then be able to purchase another vehicle the same way? .

If the pickup has a 6 foot bed, you can use Section 179 for the full amount. If it's less than that, the non-section 179 amount is spread out over 6 years (including the first year).

If your business percentage falls to 50% or less in the first 6 years, you will need to recapture the Section 179 depreciation.

Whenever you sell the vehicle, you will pay taxes on it. It won't matter if it's still a business vehicle or a personal vehicle. If you use Section 179 for the entire amount (or it is fully depreciated), the FULL sales price of the vehicle will be taxable.

As faithful as that rusty old truck has been, at some point the company will want to get rid of it. When it does, it compares the proceeds from the sale -- or the disposal cost -- with the book value of the asset and reports either a gain or a loss. Say the fully depreciated truck has a book value of zero. If the company sells the truck for $1,500, it reports a gain of $1,500 on the sale. If it has to pay $100 to get a junkyard to take it, the company reports a $100 loss. Now say the truck has been fully depreciated to a salvage value of $1,000. If the company sells the truck for $1,500, it reports a $500 gain. If it has to pay a junkyard $100 to take it, it reports a $900 loss....as you can see in the preceding...you can depreciate to a book value/salvage value/et cetera...:)

This is why I use a CPA...:rolleyes:
I am not sure if what you are stating directly applies to farms or just businesses (I am not sure if they are considered different or not). Maybe it does. Most trucks purchased for farm use would easily meet the definition of heavy vehicles being 6,000 lbs or above. The reason I mention the tax brackets is that makes sense (although the tax code does not or my questions would already have easily been answered) in assessing how much is saved in taxes. Can you answer my question directly based on what I have proposed?

Surely, you wouldn't reduce your taxes 100% of the 40k truck would you by allowing a 40k reduction in taxes? That is why I assumed it would be based on your tax rate...

In my original example, and the one I have kept the whole time, a 40k truck purchased for a farm, would reduce total taxes by 10k in the 25% tax rate. To me the time doesn't matter. For example, if it is over a five year period, it would still be 10K, or 2k per year. (This is what I am trying to determine for no other reason than to satisfy my own curiousity) ;)
 

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To answer your simple question while ignoring some of the more complex variables, yes you could fully depreciate a $40K vehicle over some period of time. At your fixed 25%, that would result in a $10K tax savings again over some period of time.

This time period is what can change depending on personal use vs business use, etc. Every discussion I've ever had with the small farmers around me in rural OH/WV doesn't indicate they treat their business expenses differently than my landlording rental expenses. The depreciation schedule for capital assets is the big difference.
 

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I am not sure if what you are stating directly applies to farms or just businesses (I am not sure if they are considered different or not). Maybe it does. Most trucks purchased for farm use would easily meet the definition of heavy vehicles being 6,000 lbs or above. The reason I mention the tax brackets is that makes sense (although the tax code does not or my questions would already have easily been answered) in assessing how much is saved in taxes. Can you answer my question directly based on what I have proposed?

Surely, you wouldn't reduce your taxes 100% of the 40k truck would you by allowing a 40k reduction in taxes? YES, you can, if it is for business, the only issue is which depreciation method you are using, which will determine how many years you need to recover the deduction That is why I assumed it would be based on your tax rate...Like I said it is NOT

In my original example, and the one I have kept the whole time, a 40k truck purchased for a farm, would reduce total taxes by 10k in the 25% tax rate. To me the time doesn't matter. For example, if it is over a five year period, it would still be 10K, or 2k per year. (This is what I am trying to determine for no other reason than to satisfy my own curiousity) ;)
The amount of the depreciation of an asset is set by the IRS, IT HAS NOTHING TO DO WITH YOUR TAX BRACKET

Example.

You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2015. You use the furniture only for business. This is the only property you placed in service this year. You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. You use GDS and the half-year convention to figure your depreciation. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. You figure your depreciation deduction using the MACRS Worksheet as follows.

MACRS Worksheet

Part I
1. MACRS system (GDS or ADS) GDS
2. Property class 7-year
3. Date placed in service 8/11/15
4. Recovery period 7-Year
5. Method and convention 200%DB/Half-Year<<<<<<<<<<<<<<<<<This is why you need a good CPA to limit your taxes, legally
6. Depreciation rate (from tables) .1429
Part II
7. Cost or other basis* $10,000
8. Business/investment use 100 %
9. Multiply line 7 by line 8 $10,000
10. Total claimed for section 179 deduction and other items -0-
11. Subtract line 10 from line 9. This is your tentative basis for depreciation $10,000
12. Multiply line 11 by .50 if the 50% special depreciation allowance applies. This is your special depreciation allowance. Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance -0-
13. Subtract line 12 from line 11. This is your basis for depreciation $10,000
14. Depreciation rate (from line 6) .1429
15. Multiply line 13 by line 14. This is your MACRS depreciation deduction $1,429
*If real estate, do not include cost (basis) of land.
If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows.

Year Basis Percentage Deduction
2016 $ 10,000 24.49% $2,449
2017 10,000 17.49 1,749
2018 10,000 12.49 1,249
2019 10,000 8.93 893
2020 10,000 8.92 892
2021 10,000 8.93 893
2022 10,000 4.46 446

then if you sum up all of these deductions from 2016-2022 and then include the $1429...you will discover your have depreciated ALL $10,000...in the 7 years allowed


The following examples are provided to show you how to use the percentage tables. In both examples, assume the following.

You use the property only for business.

You use the calendar year as your tax year.

You use GDS for all the properties.

This is why you need to sit down with a good CPA...:)
 

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Discussion Starter #14
To answer your simple question while ignoring some of the more complex variables, yes you could fully depreciate a $40K vehicle over some period of time. At your fixed 25%, that would result in a $10K tax savings again over some period of time.

This time period is what can change depending on personal use vs business use, etc. Every discussion I've ever had with the small farmers around me in rural OH/WV doesn't indicate they treat their business expenses differently than my landlording rental expenses. The depreciation schedule for capital assets is the big difference.
So, with your understanding of this, am I understanding this correctly? It sounds like I am according to what you are stating here. That the 40k truck would reduce taxes by 10k total (over any given time period) assuming a 25% tax rate/bracket?
 

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Discussion Starter #15
The amount of the depreciation of an asset is set by the IRS, IT HAS NOTHING TO DO WITH YOUR TAX BRACKET

Example.

You bought office furniture (7-year property) for $10,000 and placed it in service on August 11, 2015. You use the furniture only for business. This is the only property you placed in service this year. You did not elect a section 179 deduction and the property is not qualified property for purposes of claiming a special depreciation allowance so your property's unadjusted basis is its cost, $10,000. You use GDS and the half-year convention to figure your depreciation. You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-1. Multiply your property's unadjusted basis each year by the percentage for 7-year property given in Table A-1. You figure your depreciation deduction using the MACRS Worksheet as follows.

MACRS Worksheet

Part I
1. MACRS system (GDS or ADS) GDS
2. Property class 7-year
3. Date placed in service 8/11/15
4. Recovery period 7-Year
5. Method and convention 200%DB/Half-Year<<<<<<<<<<<<<<<<<This is why you need a good CPA to limit your taxes, legally
6. Depreciation rate (from tables) .1429
Part II
7. Cost or other basis* $10,000
8. Business/investment use 100 %
9. Multiply line 7 by line 8 $10,000
10. Total claimed for section 179 deduction and other items -0-
11. Subtract line 10 from line 9. This is your tentative basis for depreciation $10,000
12. Multiply line 11 by .50 if the 50% special depreciation allowance applies. This is your special depreciation allowance. Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance -0-
13. Subtract line 12 from line 11. This is your basis for depreciation $10,000
14. Depreciation rate (from line 6) .1429
15. Multiply line 13 by line 14. This is your MACRS depreciation deduction $1,429
*If real estate, do not include cost (basis) of land.
If there are no adjustments to the basis of the property other than depreciation, your depreciation deduction for each subsequent year of the recovery period will be as follows.

Year Basis Percentage Deduction
2016 $ 10,000 24.49% $2,449
2017 10,000 17.49 1,749
2018 10,000 12.49 1,249
2019 10,000 8.93 893
2020 10,000 8.92 892
2021 10,000 8.93 893
2022 10,000 4.46 446

then if you sum up all of these deductions from 2016-2022 and then include the $1429...you will discover your have depreciated ALL $10,000...in the 7 years allowed


The following examples are provided to show you how to use the percentage tables. In both examples, assume the following.

You use the property only for business.

You use the calendar year as your tax year.

You use GDS for all the properties.

This is why you need to sit down with a good CPA...:)
According to what you have stated here, in detail, it indeed does sound like my example works for what I am trying to figure out (which is how much does purchasing a 40k truck for farm use reduce a person's taxes). That a 40k truck would reduce a person's taxes (over any given amount of time) by 10k total. I appreciate your example, but why not just deal with the truck for a farmer?
 

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According to what you have stated here, in detail, it indeed does sound like my example works for what I am trying to figure out (which is how much does purchasing a 40k truck for farm use reduce a person's taxes). That a 40k truck would reduce a person's taxes (over any given amount of time) by 10k total. I appreciate your example, but why not just deal with the truck for a farmer?
Because a truck can be much more complicated...are you going book value vs salvage value...et cetera...YOU need to sit down with a CPA and go over your assets and how you want to depreciate them that makes sense for your farming model

If you are using it 100 percent for the farm...you should be able to recover the 40K over the 5 year class life assuming you are using MACRS, unless you are wanting to declare your truck as having a salvage value at the end of the 5 years...YOUR TAX BRACKET has nothing to do with the actual depreciation calculation...the only problem you will encounter is if your farm has so little income that depreciation causes you NOT to show a profit for x number of years in a row, the IRS will then try to classify your farm as a hobby and then disallow any deduction in excess of income...in that case, you might want to have an off-farm source of income to drive your net income to be a taxable amount...:)

http://ruraltax.org/files/uploads/Dep. Class Life Final.pdf
 

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It gets even better than that if land is leased to a farmer. An acquaintance, who is a land owner but not a farmer, has a mere 5 acres and with leasing he pays no taxes on the land including the 1 acre with his home. Which is a substantial amount.

In this kind of a 'lease' he is allowing the farmer to use his land for grazing. No money changes hands. Of course this is Texas....
 

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Discussion Starter #18
Upper5Percent

Year Basis Percentage Deduction
2016 $ 10,000 24.49% $2,449
2017 10,000 17.49 1,749
2018 10,000 12.49 1,249
2019 10,000 8.93 893
2020 10,000 8.92 892
2021 10,000 8.93 893
2022 10,000 4.46 446

Let me ask it this way just for you. How much would you save in taxes that first year with a deduction of 2,449? Maybe that will help me understand what you are explaining better.
 

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Upper5Percent

Year Basis Percentage Deduction
2016 $ 10,000 24.49% $2,449
2017 10,000 17.49 1,749
2018 10,000 12.49 1,249
2019 10,000 8.93 893
2020 10,000 8.92 892
2021 10,000 8.93 893
2022 10,000 4.46 446

Let me ask it this way just for you. How much would you save in taxes that first year with a deduction of 2,449? Maybe that will help me understand what you are explaining better.
Look...I have 100s of depreciations occurring for the farms...tractors, trucks, trailers, bines, rakes, tedders, etc...after you sum them up you then subtract them along with fertilizer, seed, supplies, repairs, et cetera from your farm income on our Schedule F...then if the total line on your schedule F is negative you subtract that from your running total on your 1040A...otherwise you add it to your running total...
 

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Discussion Starter #20
Look...I have 100s of depreciations occurring for the farms...tractors, trucks, trailers, bines, rakes, tedders, etc...after you sum them up you then subtract them along with fertilizer, seed, supplies, repairs, et cetera from your farm income on our Schedule F...then if the total line on your schedule F is negative you subtract that from your running total on your 1040A...otherwise you add it to your running total...
The reason I ask is this, when I see $2,449 as a deduction, to me, what is that saving me in actual taxes? For me, I would think that would save me $612.25 in taxes (that is where I keep using the tax rate). Since these are deduction, and not tax credits (credits are dollar for dollar, like the Volt). I see this all the time on Turbo Tax. You enter a deduction of $1,000 and it saves you $250 in actual taxes. I am just curious if that is how this works for a farm truck.
 
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