Tax Court Rules Farmer Can Use Old Tractors

The Tax Court issued a ruling on December 5 regarding an Iowa farmer. The case dealt with a part-time framer near Creston, Iowa farming about 500 acres. The farmer worked full-time as an UPS driver and did farming in the off hours. He also had incurred a heart attack in 2011 that led to perhaps the issue with the IRS. Instead of buying new tractors, the farmer elected to purchase 40-50 year tractors and place them with implements attached at each of their five farms.

This allowed the farmer to eliminate the time and effort of moving tractors from field-to-field and maintenance could be done by the farmer directly. The farmer had elected to deduct 100% of the cost of these tractors each year of purchase by utilizing Section 179.

Section 179 requires the taxpayer to list each item and this is likely what caused the audit since the IRS assumed the farmer was actually a collector of farm tractors. Especially when the farmer purchased 8 tractors in 2013, 12 in 2014 and 9 in 2015. By listing each of these tractors on the depreciation Form 4562, the IRS had a road map to follow. Without this listing, it is likley that the tax return would not have been audited.

The IRS argued the farmer’s tractor purchases was for personal use and thus no depreciation or other costs related to the tractors were allowed. The farmer was able to argue that all of these tractors were used in the farm operation and thus all of the expenses were allowed including the Section 179 expensing. Certain adjustments were allowed by the IRS related to inaccurate records, etc.

The farmers were not completely clear of owing taxes on the audit. As usual, many personal expenses were commingled with farm expenses and the Tax Court allowed the IRS to win on these items. Also, the return included errors related to certain assets that had been expensed under Section 179 were then erroneously deprecated during the years at question. The taxpayers were assessed penalties related to these incorrect deductions and the Tax Court upheld those penalties.

This is not a ground breaking case, but does show that farmers are allowed great discretion in how they want to farm. However, it also shows that farmers need to maintain good records and not commingle personal and business expenses without appropriate records.