Farming, Fuel, and Fabrication

How Tax Benefits Can Help Grow Your Farming or Ranching Business

By Geoff Garber & Kevin Sullivan, with Brady Bryan


Fuel Tax

Farmers, ranchers, growers, and other agriculture-related companies may be missing out on significant state and federal excise tax refunds and credits available to consumers of tax-paid motor fuels. For federal purposes, taxpayers may be eligible for refunds of tax paid on gallons of gasoline, diesel fuel, kerosene, and alternative fuels used in vehicles and equipment off-road, such as in farm equipment, compressors, and generators. Additionally, many states, such as California, offer a wider range of refund opportunities than the federal government to both farmers and other fuel consumers, extending exemptions to vehicles licensed for on-road use that consume fuel off of state maintained roads or on private land. This article aims to educate farming, ranching, and agriculture-driven companies consuming fuel on whether they could be claiming such refunds, if they are not doing so already. On average, one gallon of gasoline or diesel fuel purchased by an end user will have about 50 cents of federal, state, and other tax included in the purchase price. The federal taxes on gasoline and diesel fuel are 18.4 cents/gal and 24.4 cents/gal, respectively, and have not changed in over 20 years. Some farmers may purchase dyed diesel (also known as “red diesel” or “ag-diesel”) tax free from their supplier and therefore will not pay tax on the initial fuel purchase. In those instances, the farmer will not have a refund opportunity for dyed diesel consumed in a nontaxable manner because the farmer paid no tax on the fuel in the first place.

Fuel Tax Refunds

Surprisingly, many farmers do not realize that a portion, and in some cases basically all, of the state and federal motor fuel excise tax may be refundable. For example, federal statutes and regulations allow for refunds of tax paid on gasoline and diesel fuel when the fuel is used by any person in a nontaxable use, including:

  • On a farm for farming purposes
  • Off-highway business uses (other than in a highway vehicle registered or required to be registered for highway use, such as generators, construction equipment, etc.)
  • Diesel particulate filter (DPF) regeneration process (only diesel vehicles)
  • Heating equipment as heating oil
  • Refrigerated trucks and trailers
  • Auxiliary power units (APUs)

“On a Farm for Farming Purposes”

For farmers, the federal government provides specific fuel tax exemptions for fuel used on a farm for farming purposes. To qualify for the exemption, the fuel must be used (1) in carrying on a trade or business of farming, (2) on a farm in the United States, and (3) for farming purposes. A person is considered to be engaged in the trade or business of farming if the person cultivates, operates, or manages a farm for gain or profit, either as an owner or a tenant. Forestry, timber growing, and gardening/ produce cultivation for personal use are not considered as engaged in the trade or business of farming.

The term “farm” is used in its ordinary and accepted sense, and generally means land used for the production of crops, fruits, or other agricultural products or for the sustenance of livestock or poultry. A farm includes livestock, dairy, poultry, fish, fruit, fur-bearing animals, truck farms, plantations, ranches, nurseries, ranges, orchards, feed yards for fattening cattle, and greenhouses and other similar structures used primarily for the raising of agricultural or horticultural commodities.

Fuel must be consumed “for farming purposes,” which includes cultivating the soil, raising or harvesting an agricultural or horticultural commodity, or raising, shearing, feeding, caring for, training, or otherwise managing livestock, poultry, bees, or wildlife. Examples of operations include plowing, seeding, fertilizing, weed killing, corn or cotton picking, threshing, combining, baling, silo filling, and chopping silage. Additionally, use of fuel for handling, drying, packing, grading, or storing any agricultural or horticultural commodity in its unmanufactured state could be tax exempt depending on the amount of commodity produced by the owner, tenant, or operator.

Additionally, farmers and ranchers can often take advantage of state fuel tax refunds for similar activities to those described above. In California, gasoline and diesel fuel used on a farm for farming purposes is exempt from fuel tax and follows federal law in many ways. For example, say that Apples R Us, Co. consumes 100,000 gallons of undyed, taxpaid diesel fuel in non-highway vehicles and equipment on private property in connection with cultivating soil, harvesting apples, and maintaining the orchard. Apples R Us would be eligible for a full federal and state refund of its fuel tax paid because the fuel was used on a farm for farming purposes. In this scenario, the company could be eligible for over $100,000 in state and federal fuel tax refunds if claiming the maximum three years of refunds and prior use was consistent.

Taxpayers should maintain all fuel purchase receipts, invoices, and records, including the name and address of the fuel seller, date of purchase, and number of gallons purchased during the year for each type of qualified business use. Some refund claims require that the taxpayer provide such information, while others may only request support during an examination.

Cost Segregation for Farms and Ranches

A cost segregation study allows companies and individuals who have constructed, acquired, or remodeled real estate to increase cash flow by accelerating depreciation deductions and deferring income taxes. Farmers and ranchers can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. Cost Segregation is a comprehensive tax strategy that leverages the constantly changing IRS regulations, construction financing, and advancements in design and construction to maximize cash flow to farmers and ranchers.

Expense vs. Capitalize

In a Cost Segregation study, a licensed professional engineer with design and construction experience should review the construction/acquisition/improvement project and understand how it is financed, designed, and built in order to determine what costs can be immediately deducted. A thorough understanding of the tangible property regulations will help in categorizing costs as repairs (even if done in conjunction with capital improvements), dispositions, deductible transactions, and de minimis and safe harbor costs. Minimizing the costs that need to be capitalized is the first step in maximizing cash flow.

Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis.

Sec. 179 Expense & Bonus Depreciation

A powerful tool that should be used to avoid long depreciation periods, particularly for significant improvement projects (including leased property), is Sec. 179 Expensing and Bonus Depreciation. The value of each varies by year, but for 2015 there is potential for increasing deductions on certain new and used equipment by as much as $500,000 through Sec. 179 (with $2 million phase out), and 50 percent of the remaining cost through Bonus Depreciation. Single purpose agricultural (livestock) or horticultural structures are eligible for 179 deductions.

179D Energy Efficient Incentives

Tax deductions of up to $1.80 per square foot for commercial buildings can be considered in a Cost Segregation study. This valuable incentive requires a licensed professional engineer to develop an energy model and certify the building. For example, that would mean securing up to a $90,000 tax deduction for a 50,000 square foot building! This incentive applies to new construction, acquisition, and improvement building projects.

Accelerated Depreciation

A proper study will reclassify property from a 39-year recovery period into five, seven, and 15 year periods as prescribed by IRS guidelines. A detailed engineering analysis should be performed and classify property into appropriate units of property so that when they are replaced, a deduction can be claimed.

Comprehensive Documentation

The goal of any Cost Segregation study is to maximize cash flow and withstand IRS examination. A study should be backed by licensed professional engineers and tax professionals that have experience with design and construction as well as the tax code, tangible property regulations, and the cost segregation audit technique guidelines. A comprehensive, auditable report should be backed by sound engineering and crafted to advocate for property owners.

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