7907 / In the context of a cattle feeding program, when must expenses incurred in connection with the cattle program be added to inventory or capitalized?

In the case of most “tax shelters,” certain corporations engaged in farming, and partnerships with such corporations as a partner, those expenses incurred in connection with producing cattle or attributable to cattle acquired for resale must be capitalized or added to the cost of inventory.¹ Generally, including such costs in inventory or capitalizing these costs prevents a current expense deduction and has the effect of reducing income or gain from the sale of the property. Prior to 2018, an exception applies to costs associated with inventory, so that costs may be expensed if the taxpayer’s average annual gross receipts for the preceding three taxable years did not exceed $10 million (as determined under certain aggregation rules). The 2017 tax reform legislation increased the $10 million amount to $25 million for tax years beginning after 2017 (indexed to $31 million in 2025, $30,000,000 in 2024, $29 million in 2023, $27 million in 2022 and $26 million in 2020 and 2021).²

A “tax shelter” is (1) any enterprise, other than a C corporation, if at any time interests in the enterprise have been offered for sale in an offering required to be registered with any federal or state securities agency, (2) any farming enterprise other than a C corporation that allocates more than 35 percent of its losses during any period to investors who do not actively take part in the management of the operation, or (3) any enterprise a significant purpose of which is tax avoidance.³

The following types of corporations engaged in farming are exempted from the above capitalization rules (if not otherwise deemed to be “tax shelters”): (1) S corporations and (2) corporations meeting certain gross receipts tests. A corporation meets the gross receipts test if its annual gross receipts for the three prior tax years do not exceed $31 million in 2025.

So long as a partnership (provided it is not deemed to be a “tax shelter”) does not have a non-exempt corporation as a partner, it will not be subject to the above capitalization rules.⁴

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1. IRC § 263A(a).