Farm help needed - Farmer drills a well

[TaxLadyinPA]

My brain is fried already this season. Help please.

Farmer has drilled several wells in the past few years to water his cattle spending approx. $3000 for each well. They never lasted and dried up quickly so he would have to drill another.

He finally paid huge fees to find a spot where the water was. Here is the break down:

Ground water assessment (basically a water witch with equipment) $ 5035
Building a road for the driller to get to the spot where the water was found $ 1740
Digging ditch from well to barn, the actual well drilling, pump, etc. $ 16,956

Total about $ 25000.

His net profit without regard to this well is $ 35000

Can I expense this total cost?
If the well is compared to all the other wells that he had to drill then it has a very low usefull life.

Additional info is : The sole proprietor farmer is age 72 and yes he actually works the farm still, however, this year (2008) he is now finally giving all the responsibility to his son whom he has been paying contract pay for years. Now those roles will reverse.
It makes sense to me to write the total cost off.

I can do that can't I ???

{cannot believe my brain is fried this early in the season - must be an old age thing } *sigh*

Thanks in advance for your responses to put my brain back on track

[Bees Knees]

TTB, page 5-2, lists water wells for farmers as 15 year property. Section 179 is not allowed, but you can use 150%DB method.

The actual life of an asset is irrelevant to MACRS depreciation. It is whatever IRS classifies the asset that counts.

[TaxLadyinPA]

Darn - I knew that

Rats ... I did think that in the back of my mind but was hoping you would say ... sure go ahead ... LOL

Thanks so much for your response.

[TaxLadyinPA]

and also:

And I was up until 2 am trying to find that exact answer because I did know it but wanted to make sure. I was reading all in the depreciation sections of the TBB and never thought about looking in the sole prop section. Good grief ... there it is plain as day ...

Thanks so much again for putting me back in my right mind

[TaxLadyinPA]

But....

Can't I expense the $ 5035 Ground Water Assessment ???

[Bees Knees]

I don't know what a ground water assessment is. If it is equipment, then you can do the 179 deduction. If it is a land improvement, then you cannot.

[TaxLadyinPA]

Ground Assessment

This was a test performed by a company in which they found where the water was located. Somewhat similar to when the gas companies go around doing their tests to find gas pockets. So the farmer didn't get any equipment but the test is connected to the actual well drilling. I think I should be able to write the test off as an expense in the farms other expenses and not add it to the actual well drilling costs.

I would assume that I would have to keep the cost of builiding the road to the area that the water was found to be in the cost of the well as it would be a land improvement. Now that the road is there the farmer will most likely use it to get to his fields.

My very first post has a break down of the costs involved to get this well water for the cows.

I really appreciate that you are taking the time to answer my questions. Thanks so much for your kindness.

[ED SMITH]

Can't I expense the $ 5035 Ground Water Assessment ???

This sounds like a service performed to find the best water location. It has nothing to do with the creation of the well. So, yes. I would expense it.

[Fuzzy Faced Leader]

List it as a professional service, and expense it.

[TaxLadyinPA]

Correct

Yes , that is what it is and that is what I thought. I am glad the farmer listed it all out and didn't just put the total cost of the well.

I'm glad you all agree that I can write it off as expense instead of part of the well. Thanks so much.

[Davc]

Capitalize:

From the farmer's tax guide:

Water well.
You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. It is a capital expense. You recover your cost through depreciation. You also must capitalize your cost for drilling a test hole. If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. You can recover the total cost through depreciation deductions.

[Bees Knees]

I agree, all costs associated with drilling the well are added to basis for depreciation purposes, including costs associated with finding where to drill the well.

[TaxLadyinPA]

Bees and Dave

hypothetical -

What would you do if the farmer comes and says:

In December we paid $ 5000 to a company to do tests to find water.

I say ... did you find water ?

They say "NO"

You going to let them expense that fee ??? or are you still going to make them depreciate it ???

Or maybe they said "Yes .. The test found water"

I say "Did you drill a new well then "

They say "NO" We just wanted to know where the water was just incase we needed it

Now ... are you going to let them expense that test cost or make them depreciate it.

I guess I don't understand why I cannot let them expense the test cost. Instead of adding it to the well cost.

I appreciate all the inputs from everyone. It certianly wakes my brain up .. even if it wakes to more confusion LOL

[Bees Knees]

Nothing is fair about taxes.

If they just do a test to see if there is water there but have no intention of drilling a well, IRS would say there was no business purpose for doing the test, and therefore it is non-deductible.

If on the other hand they perform a test with every intention of drilling a well, but for some business reason no well was drilled, the cost of the test would be expensed, since there was a business reason for performing the test and no asset with a life greater than one year was placed in service.

[TaxLadyinPA]

hhmmmmm

Ah ha ... I see your point ...

and I do now agree with that ....

so stop my whining and add the 5000 to the other costs of the well and get on with it... LOL

I am indeed wasting way to much time on the farm trying to find excuses to expense the test.

Thanks for your final input.