Producers with trees and vines have an additional option in expensing planting costs for tax purposes

The following contains edited material from the “National Income Tax Workbook 2016” Land Grant University Tax Education Foundation Inc.

Fruit and nut growers have few options in the way they expense planting and preparatory costs. New regulations that are a part of the Protecting Americans from Tax Hikes (PATH) Act (signed into law on Dec. 18, 2015) allow for taxpayers to use bonus depreciation to partially expense these costs in the year of planting even if the taxpayer might not have been allowed to under the Alternative Depreciation Schedule (ADS) due to opting out of Uniform Capitalization (UNICAP) rules.

Generally, the UNICAP rules require farmers to capitalize the preproductive period costs if the plants have a preproductive period of more than 2 years. Pre­productive period costs are the costs of raising plants after they are planted and before they are placed in service.

Plants are treated as placed in service when they produce a crop that has a value in excess of the cost of harvesting it. Therefore, the placed-in-service date can vary from one grower to another and from one block of a grower’s plants to another. For tax purposes however, the determination that a plant has a preproductive period of more than two years is based on the national average preproductive period for that plant. Therefore, whether a plant is subject to capitalization of preproductive expenses does not vary from one grower to another or from one block of plants to another.

However, farmers (other than corporations, partnerships, and tax shelters that are required to use accrual accounting) can elect out of the UNI­CAP rules. The election out of the UNICAP rules allows farmers to deduct preproductive period costs in the year they are incurred.

Preproductive period costs are the costs of cultivating, maintaining, or developing the plant during the preproductive period. Pre­productive period costs include, but are not lim­ited to, management, irrigation, pruning, soil and water conservation (including costs the taxpayer has elected to deduct under I.R.C.§ 175), fertil­izing (including costs the taxpayer has elected to deduct under I.R.C.§ 180), frost protection, spray­ing, harvesting, storage and handling, upkeep, electricity, tax depreciation and repairs on build­ings and equipment used in raising the plants, farm overhead, taxes (except state and federal income taxes), and interest required to be capital­ized under Internal Revenue Code Section (I.R.C.§) 263A(f).

Even if the plants are not subject to the UNICAP rules either because their preproductive period is 2 years or less or because the farmer elected out of the UNICAP rules, the farmer must still capi­talize the preparatory costs (costs incurred so that the plant’s growing process may begin) for the plants, such as the costs of seeds, seedlings, plants, supplies, labor, and equipment.

Section 143 of the PATH Act adds a new option for some farmers to deduct bonus depreciation. The new option is in addition to the bonus depre­ciation rules that were in place before the PATH Act.

New I.R.C. § 168(k)(5) allows farmers to elect to deduct 50% of the cost of planting or grafting specified plants. Farmers make the election and claim the deduction in the year the plants are planted (or grafted to a plant that has already been planted). To qualify, the plants must be planted or grafted after Dec. 31, 2015, and before Jan. 1, 2020, and must be:

  1. A tree or vine that bears fruits or nuts, or
  2. Any other plant that will have more than one yield of fruits or nuts and that generally has a preproductive period of more than two years from the time of planting or grafting to the time at which it begins bearing fruits or nuts.

The farmer must reduce the basis of the plant by the allowable bonus depreciation, and he or she may not claim any additional bonus depre­ciation on the plant in the year it is placed in service. When the plant is placed in service, the farmer may claim the section 179 deduction and/or Modified Accelerated Cost Recovery System (MACRS) depreciation on the remaining basis.


General Bonus Depreciation rules

Property does not have to qualify for the general bonus depreciation to be eligible for the special elective bonus depreciation for plants that bear fruit or nuts. Therefore, it does not have to meet the following requirements:

  1. The recovery period for the property is 20 years or less.
  2. The original use of the property commenced with the taxpayer.

In addition, property that must be depreciated under ADS is eligible property.


Benefits of the new legislation

The new legislation not only allows farmers who elect out of the UNICAP rules to claim bonus depreciation they previously could not claim, it also allows farmers (whether or not they elect out of the UNICAP rules) to claim the bonus depre­ciation in the year the plants are planted instead of the year the plants are placed in service.

Deducting the bonus depreciation in an ear­lier year has two benefits. As with any deduction allowed in an earlier year, it allows the taxpayer to reap the benefit of the deduction in an earlier year, which postpones paying taxes in most cases. Deducting bonus depreciation in an earlier year also allows farmers to avoid the phaseout of the bonus depreciation for plants that were planted before 2018 but will not be placed in service until 2018 or a later year.

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  1. Hi. Would the amount that’s allowed under IC 168(k)(5) be for the plant itself or could it also include other planting costs (such as land prep, planting costs, irrigation, trellis, etc)?

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