Generally, the uniform capitalization rules (UNICAP) have required all farmers, regardless of size, to capitalize pre-productive costs of plants that have a pre-productive period of more than 2 years. IRC§ 263A(a)(1), (d)(1)(A)(ii). Pre-productive costs are the costs of raising plants after they are planted and before they are placed in service, including those associated with management, irrigation, fertilizing, depreciation, & repairs on buildings and equipment. Whether a plant has a pre-productive period of more than two years is based on the national average pre-productive period for that plant. IRS periodically publishes non-inclusive lists of such plants. Treas. Reg § 1.263A-4(b)(2)(i)(B). IRS Notice 2013-18 published the following non-inclusive list of plants with a pre-productive period of more than two years:almonds, apples, apricots, avocados, blueberries, cherries, chestnuts, coffee beans, currants, dates, figs, grapefruit, grapes, guavas, kiwifruit, kumquats, lemons, limes, macadamia nuts, mangoes, nectarines, olives, oranges, peaches, pears, pecans, persimmons, pistachio nuts, plums, pomegranates, prunes, tangelos, tangerines, tangors, and walnuts
Under pre-2018 rules, most farmers subject to these rules (except for corporations, partnerships and tax shelters required to use accrual accounting) could elect out of UNICAP and deduct the pre-productive costs in the year they were incurred. The price for this election, however, was that such farmers had to use the alternative depreciation system (ADS) to depreciate other farm assets. It also generally meant they were not eligible for bonus depreciation.[i] The same rules did not apply to trees raised, harvested, or grown by the taxpayer that did not bear fruit or nuts. Nor did the rules apply to plants with a pre-productive period of two years or less, unless the farmer was required to use accrual accounting.
The Tax Cuts and Jobs Act significantly changes this landscape. IRC § 463A(i)(1) provides an expanded exception from the UNICAP rules for “small businesses.” Under this provision, taxpayers (other than tax shelters) who meet the gross receipts test of IRC § 448(c) for any tax year, will not be subject to the UNICAP rules for that tax year. The IRC § 448(c) test requires average annual gross receipts of $25 million or less during the preceding three years.[ii]
As a result of this new law, many growers of trees and vines are now excepted from the UNICAP rules and may currently expense or depreciate their pre-productive costs.
IRC § 263A(i)(3) states that any change of accounting made under this newly expanded provision will be treated for purposes of IRC § 481 as initiated by the taxpayer and made with IRS consent. The new law is effective for tax years beginning after December 31, 2017.
We'll be watching for IRS guidance providing instruction for those who have already elected out of UNICAP under the old rules.
[i] The Path Act did provide a special elective bonus depreciation option for these farmers, whether or not they elected out of the UNICAP rules. IRC § 168(k)(5).
[ii] IRC § 263A(i)(2) clarifies that the gross receipts test will be applied in the same manner for individual taxpayers as if each trade or business of the taxpayer is a corporation or partnership.
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