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Hoophouse Depreciation in 7 easy steps!

By Laura Haselhuhn

This blog post will explain depreciation and how to use it for decision making and comparing crop profitability in just seven easy steps.

Depreciation is spreading the cost of a large item (such as a building, equipment, machinery, etc), over the years of its useful life.  The general formula for depreciation is:

(total cost – salvage value) / years of useful life = annual depreciation cost

So for example a tractor that costs $11,000, and will last 10 years, and is say worth $1,000 after ten years, has a depreciation cost of ($11,000-$1,000)/10 = $1,00 per year to use.  In this example we will show how to assign the depreciation cost to have/use the hoophouse in a way that makes sense for decision making purposes.  This is NOT a way to assign it for tax purposes.  To learn how to accurately assign depreciation for tax purposes, consult a certified public accountant.

1. Calculate the total amount to depreciate:

(Total cost – salvage value) / years of useful life = annual depreciation cost 

What to include in the amount to depreciate?  For tax purposes your answer will be different, but for decision making purposes, here is how it makes the most sense: 

Total Hoophouse Cost to depreciation = Materials + Construction Labor - Cost of Plastic 

This is the amount of money it would take you to build another one just like it.  The cost of the poly is subtracted from the total cost because the poly only lasts 4 years (not 20), so it will need to be depreciated separately.  This is not how it would be done for tax purposes, but it is how it should be done for decision making purposes.

2. Estimate Salvage Value:

(Total costsalvage value) / years of useful life = annual depreciation cost

Salvage value is the amount the item will be worth at the end of its useful life.  Since we chose 20 years for the hoophouse to last, we will be conservative and estimate that after the 20 years the hoophouse will be worth $0.  We do this because we are unsure of: the condition it will be in 20 years, the scrap metal prices 20 years, if there will be a resale market for hoophouses in 20 years.  So we will be conservative and estimate that it will be worth $0 at the end of its 20 year life.

If however you only plan to farm for say 5 years and plan to sell the house afterwards, do some research on what aftermarket older hoophouse frames sell for, and make a conservative guess as to what the salvage value will be.

3. Decide the number of years to divide the cost over:

(Total cost – salvage value) / years of useful life = annual depreciation cost

Now let's sidetrack for one moment to depreciation and taxes.  For tax purposes many farms depreciate the hoophouse over 1, 2, or 10 years, their number of years depends on what the IRS allows for.  For tax purposes this is a fine way to do things as it may allow a farm to report minimal income one year (a tax shield from depreciation).  

However for decision making & purposes it is not accurate, because it clumps the expense of the hoophouse in the beginning of its useful life; and doesn't spread it evenly throughout.  Since the purpose of the post is not to explain how to depreciate the hoophouse on your tax return but to explain how to accurately spread out the cost of the hoophouse over its useful life, in order to make accurate decisions, we will do things differently.

For comparison purposes, we should divide the cost of the house over the years of useful life.  We estimate that to be 20 years.  

Now we have all of the pieces for the formula:

(total cost – salvage value) / years of useful life = annual depreciation cost

($10,000 - $0) / 20 = $500 annual depreciation cost per year. 

If you plan be in the farming business for say only 10 years, then you might decide to depreciate the house over 10 years and estimate a higher salvage value at the end of ten years.

4. Breaking down the annual depreciation cost to assign to the crops:

Now that you have the annual cost for the hoophouse, it is time to break it down to an amount that can be easily assigned to each crop grown in the hoophouse.  The general formula is:

Annual depreciation cost / number of days in use per year / sq ft in production = Total cost per square foot per day.

To calculate this you must answer the following questions:

a) How many days of the year will the hoophouse have crops in it?

b) How many square feet of the hoophouse will be in production?

Building off of our example:

a) We plan to have crops in the house from February 15th - November 25th = 284 days

b) Total Square footage in production: 20 beds that are 3 x 28 = 1680 square feet in production

Now we take the annual cost: $500 and divide it by the square footage and the days in production.

$500 / 1680 square feet / 284 days = $0.00104 per square foot per day.

Now this may seem like a small number, but it adds up quickly.

5. Charge each crop “rent” for the time and space it takes:

Now charge each crop in the house “rent” for the time and space that it takes up. For example in the summer say I have 10 beds of cucumber (840 square feet) in the house for 90 days.

90 days x 840 square feet x $0.00104 per square foot per day = $79.22.

So $79.22 is the cost to use the hoophouse for that cucumber crop.  This cost should be included in your crop enterprise budget (more on crop enterprise budgets later),

6. Don’t forget the cost of the poly!

To reach depreciation cost of poly, do it in the same way as above:

(Cost of poly –salvage value) / years it will last / days in use per year / square footage in production

We assume that the salvage value of the plastic is $0.

Example:

$500/4 years it will last / 284 days in use per year (Feb 15- Nov 25) / 1680 sq ft in production =

$0.000262 per square foot per day

Assign it to the crop: Cucumbers, 840 square feet for 90 days

840 square feet x 90 days x $0.000262 = $19.80, cost of poly for the cucumber crop

7. How this fits into the crop enterprise budget:

Here is a quick look at how a crop enterprise budget would look for cucumbers:

Cucumber Revenue (price x quantity sold)

-          Direct costs (transplant costs, cucumber seed, compost, direct labor for transplants, planting, stringing up, watering, weeding, harvesting)

-          Overhead costs (marketing, selling, recordkeeping, overhead labor)

-          $79.22, (Depreciation costs of hoophouse)

-          $19.80, (Depreciation costs of poly)

= Profit for that crop

It takes a bit of recordkeeping, but once in the habit of it, it is easy to do.  All that you need to track to reach these numbers is: square footage of each crop, plant dates, harvest/removal from bed dates, total cost to put hoophouse into production, and the cost of the poly.  Once you have the costs assigned, you can then begin to compare crop profitability fairly and make decisions to grow the crops that are most profitable given the amount of time and space that they take up in the hoophouse.

Thanks and happy hoophouse farming!

-Laura Haselhuhn

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