7911 / What costs of a breeding program must be capitalized? When may a deduction be taken for costs that are expensed?
Expenses Added to Inventory or Capitalized
In the case of most “tax shelters,” certain corporations engaged in farming, and partnerships with a corporation 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 these costs in inventory or capitalizing these costs prevents a current expense deduction and also has the effect of reducing income or gain from the sale of the property. Therefore, taxpayers affected by these rules would generally not be able to expense the costs of breeding or raising cattle.
Exceptions to certain of the uniform capitalization rules are available to the following entities that are engaged in farming: (1) a sole proprietorship; (2) a partnership that is not a “tax shelter” and that does not have a non-exempt corporation as a partner; (3) an S Corporation engaged in farming that is not deemed to be a “tax shelter;” and (4) any corporation engaged in farming that is not deemed to be a “tax shelter” and that meets certain gross receipts tests. A corporation meets the gross receipts test if its average annual gross receipts for the three prior tax years do not exceed $25 million (indexed to $29 million in 2023 and $27 million in 2022). For purposes of the gross receipts tests, all members of a controlled group of corporations are considered one corporation.2 The exceptions available to these taxpayers are as follows:
(a) Any animal produced by the taxpayer that had a preproductive life of two years or less where costs were incurred by the taxpayer before 1989.3 While “preproductive life” is not defined in the IRC, as described here, it appears to mean the period before which the animal was reasonably expected to be sold or disposed of.4