Depreciation in Agribusiness

1. Depreciation in Agribusiness

2. Objectives • Define depreciation. • List types of assets that can be depreciated. • List the three main reasons for using depreciation. • List and describe the various methods of depreciation.

3. 1. What is Depreciation? • Depreciation is an estimate of the annual dollar loss in value associated with the ownership of a depreciable asset, and is done to recover the costs of “using up’ the farm assets.

4. 2. What can be Depreciated? • To be depreciated, an asset must not retain its value (as land does) or already be accounted for within another class of farming expenses (such as Christmas trees, breeding stock and raised dairy animals – these are considered nondepreciable assets).

5. 2. What can be Depreciated? • Types of depreciable assets include: - purchased livestock - purchased machinery - real estate improvements (building a barn, buying a tractor, improving fences, etc.)

6. 3. Three Main Reasons to Depreciate • There are three main reasons for using depreciation in an agribusiness operation: • It is needed for income tax purposes. • Assists in calculating asset value. • Helps to distribute fixed costs.

7. 4. Methods of Depreciation • There are three methods of depreciation: - straight-line depreciation - accelerated cost recovery system - modified accelerated cost recovery system

8. 4. Methods of Depreciation Straight-line Depreciation: • Often considered the most common type of depreciation. • Makes planning easier because the asset is depreciated equally over every year of its useful life. • The equation for this is: Original cost of the asset – Salvage Value _____________________________________ Useful life of the asset

9. 4. Methods of Depreciation Straight-line Depreciation: Example – A combine that originally cost $140,000 depreciated over 7 years = $20,000 per year

10. 4. Methods of Depreciation Accelerated Cost Recovery System: - The asset is depreciated more in the early years of its useful life.

11. 4. Methods of Depreciation Modified Accelerated Cost Recovery System: • Also depreciated more during the early years of the asset. • However, with MACRS, the years of an asset’s useful life are mandated by the 1986 Tax Reform Act, & therefore apply to any property placed into service after 1987.

12. 4. Methods of Depreciation Modified Accelerated Cost Recovery System (cont.): - Under this depreciation method, the cost of a specific assets can be recovered over a set number of years (3, 5, 7, 10, 15, or 20), depending on the type of asset involved.