Answer: Combining teaching with farming is no small feat, and investing in essential agricultural assets like tractors and sheds is a big step in scaling up your operations. The financial implications can often feel overwhelming in the early years, and, as you’ve experienced, the tax treatment of such investments often surprises new business owners.
The reason you were unable to claim a full deduction for the tractor and shed in the year of purchase comes down to the rules around capital allowances.
Why aren’t full deductions allowed in year one? When you purchase items like machinery or construct buildings for your farming business, these are considered capital items. That means they are not treated in the same way as day-to-day operating costs. Instead of deducting the full cost in the first year, you are required to claim what’s known as capital allowances, which spread the deduction over the “useful life” of the asset and this can span several years. It is based on the logic that these assets provide value over a number of years, and therefore, the tax relief should mirror their usage and depreciation over time.
How does capital allowances work?
Tractors and other machinery: For movable assets like your tractor, the capital allowance is spread over eight years at an annual rate of 12.5%. This means you can only deduct 12.5% of the tractor’s cost each year from your taxable income rather than the entire cost upfront.
Farm buildings and structures: The rules differ slightly for fixed, immovable assets like your €80,000 shed. The allowance is calculated over seven years, with 15% of the cost deductible each year for the first six years and the remaining 10% in the seventh year. This method aligns the tax deduction with the depreciation of the asset’s value over time, reflecting its gradual wear and use.
This staged relief can be frustrating, particularly from a cash-flow perspective. When you’re investing heavily in equipment and infrastructure, you’re typically paying significant amounts upfront. The delay in receiving the full tax benefit doesn’t reflect that immediate financial outlay, which is why it feels like you’re not getting the relief you expected. Still, while the deduction is spread out, you will eventually receive full tax relief over the prescribed timeline.
Marty Murphy, head of tax with ifac.
Farming operations
You may be wondering whether there’s a more efficient way to manage these expenses from a tax point of view, especially as your farming operation grows. One such option is to consider incorporating your farming business—that is, setting up a limited company to operate the farm.
There are a few considerations:
• Tax efficiency: If you farm through a company, the profits it earns are generally taxed at the corporation tax rate of 12.5%, which is substantially lower than personal income tax rates, particularly once your income enters the higher tax bands. Importantly, your teaching salary and your company’s profits would be treated separately for tax purposes.
• Asset management: As a company, assets like tractors can be sold to the company, allowing it to claim the capital allowances. For sheds and other immovable structures, they can be leased to the company.
• Financial flexibility: A corporate structure provides flexibility in how profits are managed, retained, or distributed, which can be tax-efficient depending on your personal tax situation.
However, transitioning to a corporate entity does increase regulatory and administrative responsibilities. It requires careful management of accounts, adherence to compliance requirements, and possibly higher accounting fees. Additionally, assets owned by a company may need to be more formally documented, particularly if used personally.
In summary, while you can’t deduct the full cost of tractors and sheds in the first year, spreading the deduction over several years can assist in smoothing out tax payments and aiding cash flow management.
Considering a company formation could offer further tax and operational benefits, provided you are prepared for the added complexity it brings.
For your €50,000 tractor, you can claim €6,250 each year for eight years as machinery has a standard rate of 12.5%.For your €80,000 shed, following the rules of 15% for the first six years, you can deduct €12,000 annually. This is followed by a final €8,000 deduction in the seventh year, which is at 10%.Marty Murphy is head of tax at ifac,
which is the professional services firm for farming, food and agribusinesses.
Answer: Combining teaching with farming is no small feat, and investing in essential agricultural assets like tractors and sheds is a big step in scaling up your operations. The financial implications can often feel overwhelming in the early years, and, as you’ve experienced, the tax treatment of such investments often surprises new business owners.
The reason you were unable to claim a full deduction for the tractor and shed in the year of purchase comes down to the rules around capital allowances.
Why aren’t full deductions allowed in year one? When you purchase items like machinery or construct buildings for your farming business, these are considered capital items. That means they are not treated in the same way as day-to-day operating costs. Instead of deducting the full cost in the first year, you are required to claim what’s known as capital allowances, which spread the deduction over the “useful life” of the asset and this can span several years. It is based on the logic that these assets provide value over a number of years, and therefore, the tax relief should mirror their usage and depreciation over time.
How does capital allowances work?
Tractors and other machinery: For movable assets like your tractor, the capital allowance is spread over eight years at an annual rate of 12.5%. This means you can only deduct 12.5% of the tractor’s cost each year from your taxable income rather than the entire cost upfront.
Farm buildings and structures: The rules differ slightly for fixed, immovable assets like your €80,000 shed. The allowance is calculated over seven years, with 15% of the cost deductible each year for the first six years and the remaining 10% in the seventh year. This method aligns the tax deduction with the depreciation of the asset’s value over time, reflecting its gradual wear and use.
This staged relief can be frustrating, particularly from a cash-flow perspective. When you’re investing heavily in equipment and infrastructure, you’re typically paying significant amounts upfront. The delay in receiving the full tax benefit doesn’t reflect that immediate financial outlay, which is why it feels like you’re not getting the relief you expected. Still, while the deduction is spread out, you will eventually receive full tax relief over the prescribed timeline.
Marty Murphy, head of tax with ifac.
Farming operations
You may be wondering whether there’s a more efficient way to manage these expenses from a tax point of view, especially as your farming operation grows. One such option is to consider incorporating your farming business—that is, setting up a limited company to operate the farm.
There are a few considerations:
• Tax efficiency: If you farm through a company, the profits it earns are generally taxed at the corporation tax rate of 12.5%, which is substantially lower than personal income tax rates, particularly once your income enters the higher tax bands. Importantly, your teaching salary and your company’s profits would be treated separately for tax purposes.
• Asset management: As a company, assets like tractors can be sold to the company, allowing it to claim the capital allowances. For sheds and other immovable structures, they can be leased to the company.
• Financial flexibility: A corporate structure provides flexibility in how profits are managed, retained, or distributed, which can be tax-efficient depending on your personal tax situation.
However, transitioning to a corporate entity does increase regulatory and administrative responsibilities. It requires careful management of accounts, adherence to compliance requirements, and possibly higher accounting fees. Additionally, assets owned by a company may need to be more formally documented, particularly if used personally.
In summary, while you can’t deduct the full cost of tractors and sheds in the first year, spreading the deduction over several years can assist in smoothing out tax payments and aiding cash flow management.
Considering a company formation could offer further tax and operational benefits, provided you are prepared for the added complexity it brings.
For your €50,000 tractor, you can claim €6,250 each year for eight years as machinery has a standard rate of 12.5%.For your €80,000 shed, following the rules of 15% for the first six years, you can deduct €12,000 annually. This is followed by a final €8,000 deduction in the seventh year, which is at 10%.Marty Murphy is head of tax at ifac,
which is the professional services firm for farming, food and agribusinesses.
SHARING OPTIONS