Expense or Asset - Irrigation Well that didn't pan out


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I am new to Accountant Forums, and this is my first post. I'm not sure if this is the right category.

My wife and I run a farm business, and this past year, we decided to drill an irrigation well, hoping that we could improve available water source for drought times. The purpose of the well was for the farm business (we already have a well for household purposes).

The well driller went down to 500 feet, at a cost of approximately $8,000, but was only able to obtain a yield of 1 gallon per minute. We were (naively) hoping for 30 gallons per minute. While options exist for increasing the yield of the well (hydrofracking), the cost/benefit ratio seems too high. Even the cost of installing a pump and wiring and piping, without doing the hydrofracking, would be prohibitively expensive. We are likely going to abandon development of the well.

My question has to do with how to treat this expense. Had the outcome of this effort been positive, I am certain that the proper treatment of this expense would be to create an asset, determine it's useful life, and depreciate it according to the proper schedule. However, the literature I have read describing this process indicates that the starting date of the asset is the date it was "placed in service". In this case, we haven't placed it in service, and will probably not place it in service in the future.

So, should we simply expense it? What category of expense should it go under on the Schedule F?

Section 179 comes to mind, but again, since we've never placed it in service, I'm not sure this would be a valid path.

Any other method come to mind?

Many thanks for any suggestions.

Al
 
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kirby

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Sorry about the dry well.
Refer to IRS Publication 225
Section 5 discusses your dry well and to report it as an abandonment
Section 8 says Abandonments are reported on form 4797 Part II line 10
(so Publication 225 says it's an expense of the year of abandonment)
Be sure to check with your own tax advisor on this
 
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Kirby

Thank you very much. This is exactly what I was hoping to learn! Thanks for taking the time!
 
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i'm new member.I come from Viet Nam.I join in forum to improve major Accounting Engligh.Nice to meet everybody :)
 

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