Cattle Depreciation, how to correct pryor years 2011,2012,2013

[b52bomer]

Client has sch F farming/ranching, purchased 12 head of heifers & one bull, in 2011. Previous tax preparer put all 12 on one asset in depreciation instead of listing them one asset at a time. Type = Macrs, Asset Class= 7, Dep.Method =150DB, Macrs Conversion =HY. I was going to set them as seperate assets class 5 instead of 7 for the 2014 tax year return.
I was going to amend the 2011,12,13 returns and list each one seperate, this should give me the correct depreciation for each year. Changing from 7 to 5 class would adjust the amount of depreciation for each year. i was able to get the dollar amount for each head and date of purchase, some were different dates but all in the same month. This came up because one of the hefiers died in 2014 and client wants some kind of adjustment, but client is leary of a audit. just trying to get a little guidence, maybe someone had a situation like this in their practice and did it differently.

[TaxGuyBill]

If you were keeping the same depreciation recovery period, you could separate them into 12 separate assets without doing anything special. Then dispose of the one asset that died.

However, you are asking how to change from 7 year to 5 year. Because it's been done incorrectly for two or more years, you need to file Form 3115 with code "7" to change from an "impermissible to permissible" method of depreciation. You would then add the 481(a) adjustment to 'catch up' on the difference of depreciation.

[Roland Slugg]

That's an interesting combination of life and method you presented. The correct MACRS life for cattle is, indeed, 5-years. The ADS life, however, is 7-years for cattle ... the so-called "class life. Perhaps that is what the other tax preparer intended to use. However, ADS uses the SL method, whereas you wrote that the method actually used was 150DB, which would be incorrect under either GDS or ADS. What was actually elected on the 2011 return ... MACRS (GDS) or ADS?

If it was MACRS, then after three years, through 2013, the twelve cattle have been underdepreciated by about 37%, but if the ADS method was elected, they have been overdepreciated by about 25%.

What to do? I would probably do nothing ... just keep this group of cattle on the same schedule, even though it is wrong. In a few years everything will be fully depreciated anyway. If the overall cost of the herd was considerable, so the adjustment would be large as well, I might consider filing F-3115, but I would be very reluctant to do that unless it seemed absolutely necessary. Have you ever seen F-3115? Not a fun form to complete and file.

Regarding the one that died, just figure the loss using the actual depreciation taken, even though it is incorrect. At least that will correct everything for that one individual.

Finally, your concern about one asset versus twelve is unnecessary. Just record the cattle individually on the detailed depreciation schedule. The amounts reported on the tax return, on F-4562, are always totals by category anyway.

[RitaB]

Absolutely

[QUOTE=Roland Slugg;173737]If it was MACRS, then after three years, through 2013, the twelve cattle have been underdepreciated by about 37%, but if the ADS method was elected, they have been overdepreciated by about 25%.

What to do? I would probably do nothing ... just keep this group of cattle on the same schedule, even though it is wrong. In a few years everything will be fully depreciated anyway.QUOTE]

Totally agree with continuing the depreciation that was started. I realize that is not what you asked advice about, and maybe you feel compelled to correct the record and set things straight. But practically speaking, I suspect there is probably very little tax liability at issue here, and the unless you are doing this out of the goodness of your heart, the client is going to forgo some of the immediate savings in tax prep fees. The ultimate tax savings will probably be the same over time, so I'd let sleeping dogs lie.

[RitaB]

I know I would

If you were keeping the same depreciation recovery period, you could separate them into 12 separate assets without doing anything special. Then dispose of the one asset that died.

Exactly what I'd do.

[Corduroy Frog]

Ditto Here

I agree also with doing nothing, and continuing the same schedule as was started, albeit incorrect.

I will tell you if these returns were audited, and the auditor were confronted with making all the corrections
himself (herself), the auditor would probably just let it go and let the situation rot out over the years.
Auditor would only go to the trouble if there was a very large dollar purchase and there was recovery in
early years for the govt.

[Black Bart]

That's an interesting combination of life and method you presented. The correct MACRS life for cattle is, indeed, 5-years. The ADS life, however, is 7-years for cattle ... the so-called "class life. Perhaps that is what the other tax preparer intended to use. However, ADS uses the SL method, whereas you wrote that the method actually used was 150DB, which would be incorrect under either GDS or ADS. What was actually elected on the 2011 return ... MACRS (GDS) or ADS?

If it was MACRS, then after three years, through 2013, the twelve cattle have been underdepreciated by about 37%, but if the ADS method was elected, they have been overdepreciated by about 25%.

What to do? I would probably do nothing ... just keep this group of cattle on the same schedule, even though it is wrong. In a few years everything will be fully depreciated anyway. If the overall cost of the herd was considerable, so the adjustment would be large as well, I might consider filing F-3115, but I would be very reluctant to do that unless it seemed absolutely necessary. Have you ever seen F-3115? Not a fun form to complete and file.

Regarding the one that died, just figure the loss using the actual depreciation taken, even though it is incorrect. At least that will correct everything for that one individual.

Finally, your concern about one asset versus twelve is unnecessary. Just record the cattle individually on the detailed depreciation schedule. The amounts reported on the tax return, on F-4562, are always totals by category anyway.

I agree with you about what to do (unless I was looking for a good bit of summer work and the client was anxious to shell out several hundred dollars for not much of nothin'), but I take exception with your above (highlighted) statement re the 150%. It's my understanding that agricultural property IS depreciated at 150% DB. True? Here's a couple of quotes from IRS Pub. 225 (Depreciation).



Property used in farming business. For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods.

•The straight line method over a GDS recovery period.


•The straight line method over an ADS recovery period.

[RitaB]

True

I agree with you about what to do (unless I was looking for a good bit of summer work and the client was anxious to shell out several hundred dollars for not much of nothin'), but I take exception with your above (highlighted) statement re the 150%. It's my understanding that agricultural property IS depreciated at 150% DB. True?

Nice catch, Mr. BB. I totally missed that, and I am a farm girl with 22 items on my depreciation schedule. Moove to the front of the class. (I was also a teacher in a former life.)

[AJsTax]

nothing wrong

It sounds like the method used was a permissible method. I often look for a lessor permissible method if the income is low that year.
To use a group as a depreciation asset is normal with cattle. you buy 7 breeding cattle and list them as a single unit. You depreciate that group all the way out even if one or more dies.
Any that are sold are listed on the 4797 with 0 basis and the depreciation stays the same.
Let me add: it would be unusual to group the bull with the heifers, mostly because the date into service are often not the same. BUT, assuming these are beef cattle and the heifers were of breeding age and were exposed to the bull then they all went into service in the same year. So that could be correct. Now for dairy heifers it would be different, they are in service when they calve and start to produce milk, not when they are bred like beef cattle.
There is no adjustment for the one animal of the group that was lost because the cost is fully depreciated with the asset group.

[Roland Slugg]

Nice catch, Mr. BB.

Yes, it was. All it means, though, is that the depreciation taken is actually closer to the correct amount that should have been taken, lowering the error factor even more.

The OP didn't say what the cattle were used for, but we all seem to be assuming they were purchased for breeding and/or dairy. (Well, the bull probably wasn't acquired for dairy, unless the owner is a really naive farmer.) If the farmer bought the heifers to raise and then sell, however, then they aren't depreciable at all, but are either deductible when purchased or inventoried ... whichever the farmer elects to do. (Regs §1.61-4(b))

[Black Bart]

Dear b52,

Cattle Depreciation, how to correct pryor years 2011,2012,2013

I don't know if we helped out any about your depreciation question (I hope so), but as a resident of Arkansas I simply couldn't (and please accept my apologies in advance) pass this up. The correct Pryor years were as follows: Arkansas Senator Mark Pryor served from 2003 until 2015; however the prior Pryor, his father, Arkansas Senator David Pryor, served from 1979 to 1997.

Please feel free to take a shot at me anytime or maybe advise me to take two running jumps and go straight to....

P.S. Interesting question, but I think the consensus is that you're spinning your wheels somewhat and the problem isn't really worth the effort required. Save your strength; in this business you'll need it later for the serious money stuff.

Best regards, BB

[b52bomer]

Thanks for all the options, i have taken care of this. b52