Tax Facts
7910 / Are breeding cattle depreciable?
Yes. Amounts expended for the purchase of breeding cattle are capital expenditures for which depreciation deductions may be taken.1 Because most investment entities involved in cattle breeding must capitalize the expenses of breeding and raising cattle (see Q 7911), the depreciation allowance is of significant importance. Accrual basis taxpayers may elect to inventory breeding cattle instead of capitalizing the purchase price and taking depreciation deductions2 (see Q 7913).
Depreciation deductions cannot be taken for the period before property is first “placed in service,” that is, placed in a condition or state of readiness for a specified function in a business or investment.3 Thus, if the taxpayer acquires immature livestock not yet suitable for breeding, the cost cannot be depreciated until the livestock reach maturity.4
The method of determining the amount of allowable depreciation deduction depends on when the property is placed in service. Cattle placed in service after 1986 are depreciated under a modified form of the Accelerated Cost Recovery System (ACRS).
The post-1986 ACRS deduction is determined by depreciating cattle as follows: (1) over a five or seven year period using the 150 percent declining balance method, changing to the straight line method for the taxable year for which the change in methods yields a larger allowance; or (2) over a five or seven year period using the straight line method. The same method and period must be used for all cattle placed in service during the same year.5 The initial basis of the property is the basis upon acquisition (usually the cost of the property, see Q 692), reduced by the amount, if any, elected for amortization or an IRC Section 179 deduction (see Q 716). Basis is reduced each year by the amount of depreciation allowable (whether or not the deduction is actually taken).6 Alternatively, depreciation can be calculated by multiplying the unadjusted basis of the property by depreciation rates contained in Revenue Procedure 89-15.7
Depreciation is limited in the years when cattle are acquired or disposed of. Cattle are treated as placed in service or disposed of on the midpoint of the year of acquisition or disposition and depreciation may be taken for the half year. However, if more than 40 percent of the aggregate value of depreciable property (other than residential rental property and nonresidential real property) placed in service for the year is placed in service during the last three months of the year, cattle placed in service during any quarter of a year are treated as placed in service on the midpoint of that quarter. Property placed in service and disposed of in the same year is not taken into account under the 40 percent test and the mid-quarter convention.8
On sale or disposition of cattle placed in service after 1980, amounts deducted for depreciation are recaptured as ordinary income, so that gain is ordinary income to the extent of depreciation taken.9 Amounts expensed under the provisions of IRC Section 179 (discussed in Q 7911 and Q 716) and the adjustments to basis that resulted from claiming the investment tax credit (see Q 7894) are treated as depreciation deductions.10 See Q 716 for a general explanation of depreciation.
1. Treas. Reg. § 1.162-12(a).
2. Treas. Reg. § 1.61-4(b).
3. Prop. Treas. Reg. § 1.168-2(l)(2).
4. See Farmer’s Tax Guide, IRS Pub. 225 (2019), p. 37.
5. IRC §§ 168(b), 168(c), 168(g); Rev. Proc. 88-22, 1988-1 CB 785.
6. IRC §§ 1012, 1016(a).
7. 1989-1 CB 816.
8. IRC § 168(d).
9. IRC § 1245(a).
10. IRC §§ 1245(a)(2)(c), 50(c)(4).
Depreciation deductions cannot be taken for the period before property is first “placed in service,” that is, placed in a condition or state of readiness for a specified function in a business or investment.3 Thus, if the taxpayer acquires immature livestock not yet suitable for breeding, the cost cannot be depreciated until the livestock reach maturity.4
The method of determining the amount of allowable depreciation deduction depends on when the property is placed in service. Cattle placed in service after 1986 are depreciated under a modified form of the Accelerated Cost Recovery System (ACRS).
The post-1986 ACRS deduction is determined by depreciating cattle as follows: (1) over a five or seven year period using the 150 percent declining balance method, changing to the straight line method for the taxable year for which the change in methods yields a larger allowance; or (2) over a five or seven year period using the straight line method. The same method and period must be used for all cattle placed in service during the same year.5 The initial basis of the property is the basis upon acquisition (usually the cost of the property, see Q 692), reduced by the amount, if any, elected for amortization or an IRC Section 179 deduction (see Q 716). Basis is reduced each year by the amount of depreciation allowable (whether or not the deduction is actually taken).6 Alternatively, depreciation can be calculated by multiplying the unadjusted basis of the property by depreciation rates contained in Revenue Procedure 89-15.7
Depreciation is limited in the years when cattle are acquired or disposed of. Cattle are treated as placed in service or disposed of on the midpoint of the year of acquisition or disposition and depreciation may be taken for the half year. However, if more than 40 percent of the aggregate value of depreciable property (other than residential rental property and nonresidential real property) placed in service for the year is placed in service during the last three months of the year, cattle placed in service during any quarter of a year are treated as placed in service on the midpoint of that quarter. Property placed in service and disposed of in the same year is not taken into account under the 40 percent test and the mid-quarter convention.8
Recapture on Sale
On sale or disposition of cattle placed in service after 1980, amounts deducted for depreciation are recaptured as ordinary income, so that gain is ordinary income to the extent of depreciation taken.9 Amounts expensed under the provisions of IRC Section 179 (discussed in Q 7911 and Q 716) and the adjustments to basis that resulted from claiming the investment tax credit (see Q 7894) are treated as depreciation deductions.10 See Q 716 for a general explanation of depreciation.
1. Treas. Reg. § 1.162-12(a).
2. Treas. Reg. § 1.61-4(b).
3. Prop. Treas. Reg. § 1.168-2(l)(2).
4. See Farmer’s Tax Guide, IRS Pub. 225 (2019), p. 37.
5. IRC §§ 168(b), 168(c), 168(g); Rev. Proc. 88-22, 1988-1 CB 785.
6. IRC §§ 1012, 1016(a).
7. 1989-1 CB 816.
8. IRC § 168(d).
9. IRC § 1245(a).
10. IRC §§ 1245(a)(2)(c), 50(c)(4).
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