Business expenses are tax-deductible, or at least they usually are. The Internal Revenue Code (IRC) does not allow the deduction of some business-related expenditures. The Uniform Capitalization (UNICAP) rules, for example, require businesses to capitalize certain expenses, or include them in inventory costs. This can present disadvantages in terms of tax liability. The IRC makes an exception for farm businesses, although this may come with additional rules regarding depreciation that may have their own disadvantages. The Tax Cuts and Jobs Act (TCJA) of 2017 amended the IRC to allow other businesses to opt out of the UNICAP rules, but without being subject to the special depreciation rules. In early 2020, the IRS released guidance on how farming businesses can use the new exemption provided by the TCJA.
What Are the Uniform Capitalization Rules?
Under § 263A of the IRC, certain expenses must be capitalized or treated as inventory costs. The UNICAP rules apply to direct and indirect costs associated with real or personal property that is “produced by the taxpayer,” or that is acquired as a capital asset for the purpose of resale. These rules are significant in capital-intensive businesses like real estate. Direct costs include materials and labor directly involved in development or construction. Indirect costs arise from similar activities that benefit a property.
How Do the UNICAP Rules Apply to Farmers?
Section 263A(d)(1) exempts farmers from the UNICAP rules altogether for livestock and plants with “a preproductive period of 2 years or less.” The IRS periodically publishes a list of plants that fit this description. The most recent list, published in 2013, includes apples, coffee beans, grapes, lemons, olives, oranges, and walnuts.