@mawestcott wrote:
I own a small farm, 64 acres, and have thought about going into cattle business. I just thought if I were to buy farm equipment, it might be a good time to take a small amount out of my 401k and then write off the purchase to get back some of the withheld taxes. I usually do not have to pay any taxes, and file with just standard deductions (no itemized deductions). Because of that, just seems to my advantage to buy and then get back as much as possible.
When you buy equipment for a farm or business with an expected life of more than 1 year, that is an asset. Assets must generally be depreciated over their useful life. In other words, if you buy a tractor with a 15 year life, you would deduct 1/15th the cost per year over 15 years as a farm expense. (It's a bit more complicated than that, but that's the general idea.)
There are several ways of deducting the entire cost in the year you buy the asset. These are applicable to business in general, but I don't know if the rules for farm assets are different. There is section 179 depreciation and "bonus" depreciation (two different things). Items costing less than $2,500 can be treated as an expense, and items costing less than 2% of the business revenue for the year can be treated as an expense instead of an asset. If you use section 179 or bonus depreciation to deduct the entire cost all at once, and then stop using the asset for business before the end of the recovery period, you have to repay or recapture the depreciation deduction. (For example, if you buy a tractor with a 15 year life expectancy and use section 179 to depreciate it all at once, then you stop using it for farming in 5 years, you have to repay 10/15ths of the depreciation deduction. "Stop using the asset in your business" includes, you stop farming due to age or injury, or unprofitability, or you sell the tractor to someone else even if you keep on farming.
Certainly, if you have a farm and you buy equipment, that will offset any income from the farm. You may be able to deduct a loss. Your tax return would include the income from 401k withdrawal, that could be combined with a loss on the farm to reduce your overall net taxable income. However, there are some limits to deducting farm losses.
You may want to see a local tax professional.
