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IRS Issues Uniform Capitalization Guidance for Farmers
(Parker Tax Publishing February 2020)
The IRS issued guidance which provides the exclusive procedures for a taxpayer to revoke an election under Code Sec. 263A(d)(3) to have the uniform capitalization rules not apply to certain plants produced by the taxpayer in a farming business. The guidance also provides the exclusive procedures for a taxpayer in a farming business, who uses the exemption from the application of Code Sec. 263A provided under Code Sec. 263A(i) but who no longer qualifies as a small business taxpayer eligible to use such exemption, that wants to make an election for certain plants produced by the taxpayer in a farming business for the first tax year in which the taxpayer is ineligible to use the exemption in Code Sec. 263A(i). Rev. Proc. 2020-13.
Background
Generally, under Code Sec. 263A, direct costs and an allocable portion of indirect costs of certain property produced or acquired for resale by a taxpayer are required to be included in inventory costs, in the case of property that is inventory in the hands of the taxpayer, or to be capitalized, in the case of other property. Code Sec. 263A(d)(3) and its accompanying regulations allow certain taxpayers that are not required to use an accrual method of accounting under Code Sec. 447 (relating to certain corporations engaged in farming) or Code Sec. 448(a)(3) (relating to tax shelters) to make an election to have Code Sec. 263A not apply to certain costs related to certain plants produced in any farming business carried on by such taxpayer. Code Sec. 263A(e)(4) and Reg. Sec. 1.263A-4(a)(4) generally define the term "farming business" as a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity, including: the trade or business of operating a nursery or sod farm; the raising or harvesting of trees bearing fruit, nuts, or other crops; the raising of ornamental trees (other than evergreen trees that are more than six years old at the time they are severed from their roots); and the raising, shearing, feeding, caring for, training, and management of animals.
If the election under Code Sec. 263A(d)(3) is made, special rules in Code Sec. 263A(e)(1) and (2) provide that the plants produced by the taxpayer are treated as Code Sec. 1245 property, if not otherwise Code Sec. 1245 property, and any gain resulting from any disposition of a plant is recaptured to the extent of the total amount of the deductions that, but for the election, would have been required to be capitalized with respect to the plant. In addition, the alternative depreciation system (ADS) must be applied to all property used predominantly in any farming business of the taxpayer or related person and placed in service in any tax year during which the election is in effect.
Code Sec. 263A(d)(3)(D) and Reg. Sec. 1.263A-4(d)(1) provide that an election under Code Sec. 263A(d)(3) not to capitalize costs under Code Sec. 263A for certain plants produced in the taxpayer's farming business is a method of accounting and, once made, may be revoked only with IRS consent. A taxpayer must file a change in method of accounting request using the non-automatic change procedures of Rev. Proc. 2015-13 (or its successor) to revoke its election under Code Sec. 263A(d)(3) before applying Code Sec. 263A to such capitalizable costs.
The Tax Cuts and Jobs Act of 2017 (TCJA) added Code Sec. 263A(i), which provides that Code Sec. 263A does not apply to a taxpayer, other than a tax shelter prohibited from using the cash method of accounting, for a tax year in which the taxpayer qualifies as a small business taxpayer by satisfying the gross receipts test of Code Sec. 448(c). Code Sec. 263A(i) applies to tax years beginning after December 31, 2017.
Rev. Proc. 2020-13
In mid-February, the IRS issued Rev. Proc. 2020-13 which provides the exclusive procedures for a taxpayer that elected under Code Sec. 263A(d)(3) to have Code Sec. 263A not apply to certain plants produced by the taxpayer in a farming business if the taxpayer: (1) wants to revoke its election under Code Sec. 263A(d)(3); (2) qualifies as a small business taxpayer within the meaning of Code Sec. 263A(i); and (3) wants to apply the exemption from Code Sec. 263A that is provided in Code Sec. 263A(i) beginning with such revocation tax year. Rev. Proc. 2020-13 also provides the exclusive procedures for a taxpayer in a farming business that uses the exemption from the application of Code Sec. 263A provided under Code Sec. 263A(i) if the taxpayer: (1) no longer qualifies as a small business taxpayer eligible to use the exemption under Code Sec. 263A(i); and (2) wants to make an election under Code Sec. 263A(d)(3) and the accompanying regulations for certain plants produced by the taxpayer in a farming business for the first tax year in which the taxpayer is ineligible to use the exemption in Code Sec. 263A(i).
According to the IRS, some taxpayers have inquired whether they must file a Form 3115, Application for Change in Accounting Method, to revoke the election under Code Sec. 263A(d)(3) and to apply the exemption under Code Sec. 263A(i) for the same tax year. In Rev. Proc. 2020-13, the IRS provides that a taxpayer that revokes its election under Code Sec. 263A(d)(3) and applies the exemption under Code Sec. 263A(i) for the same tax year is not changing its treatment of plants produced in the taxpayer's farming business and, consequently, there is no change in method of accounting under Code Sec. 446(e). However, IRS consent is needed to revoke the election under Code Sec. 263A(d)(3).
Taxpayer Eligible to Use Rev. Proc. 2020-13
Rev. Proc. 2020-13 applies to a taxpayer that:
(1) is an eligible small business taxpayer (as defined below) that wants to revoke its election made under Code Sec. 263A(d)(3), and in the same tax year, apply the exemption under Code Sec. 263A(i); or
(2) is a former eligible small business taxpayer (as defined below) that wants to make an election under Code Sec. 263A(d)(3) in the first tax year that the taxpayer no longer qualifies to use the exemption under Code Sec. 263A(i); or
(3) is a related person of either (i) an eligible small business taxpayer, or (ii) a former eligible small business taxpayer.
An eligible small business taxpayer is a taxpayer, other than a tax shelter, that meets the Code Sec. 448(c) gross receipts test and that made a valid election under Code Sec. 263A(d)(3) for plants produced in the taxpayer's farming business for a tax year before the tax year for which the taxpayer wants to revoke such election and properly implemented the election under Code Sec. 263A(d)(3).
A former eligible small business taxpayer is a taxpayer whose method of accounting is not to capitalize costs under Code Sec. 263A based on the exemption provided in Code Sec. 263A(i), and for the tax year becomes ineligible to use the exemption under Code Sec. 263A(i) and is eligible to and wants to elect under Code Sec. 263A(d)(3) not to capitalize costs under Code Sec. 263A for certain plants produced in the taxpayer's farming business.
For a discussion of the Code Sec. 263A(i) small business exception to the uniform capitalization rules, see Parker Tax ¶242,420.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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