Estimating and Using Capitalization Values for Raised Dairy Replacements

Abstract

The Tax Reform Act of 1986 indicates that farmers must either: (I) use straight-line depreciation over the longer Alternative MACRS recovery periods on all depreciable assets, or (2) capitalize the preproductive expenses for all applicable assets with preproductive lives in excess of two years and be a 11 owed to use more rapid depreciation methods. The preproductive period is defined to start at conception or embryo transfer. This means that dairy farmers must either use the slower depreciation methods or capitalize the costs of raising youngstock. An important element in this decision is the magnitude of costs to be capitalized. Few farmers keep enterprise records. Even if they did keep such records, many of the costs of raising replacements are joint costs that must be arbitrarily allocated to heifers, cows or other enterprises. The first objective of this paper is to provide some background information to assist in determining appropriate capitalization values. The second objective of this paper is to provide farmers and their tax advisors with some ideas on how to do the record keeping required. Because costs change over time, some heifers are sold or die before freshening and the exact period from birth to freshening can vary widely in any herd, accurate record keeping is not a simple chore.