Help for sod and nursery farms.

• Author: Beck, Allen M.
• Position: Tax help

While its troubles are well known, the farming industry is still one of America's most important drivers of the U.S. economy. The Federal government has worked diligently to help this industry, by providing grants, subsidies and other benefits. In particular, sod and nursery farming are growing segments that the Code has singled out for special tax treatment.

Accounting Method

The Code offers many exceptions to the general rules, specifically designed to help different segments of the farming industry not only to survive, but to thrive. Use of the cash method of accounting is one such exception. Sec. 447 deals with accounting methods for corporations engaged in farming. Farming taxpayers may also refer to IRS Pub. No. 225, Farmer's Tax Guide, for guidance. Both the Code and Pub. No. 225 state that the taxable income of a corporation, or a partnership with a corporate partner, engaged in the trade or business of farming will be computed on the accrual method.

However, Sec. 447(a) and (c) pro vide exceptions for corporations of partnerships with corporate partners that operate sod or nursery farms, S corporations and corporations with gross receipts of $1 million or less. (According to Sec. 447(d)(1), this threshold is determined by taking the gross receipts of all affiliated corporations (within the meaning of Sec. 1563(a)) into account.) Farmers who qualify; and who otherwise maintain their books on the accrual basis for financial statement presentation, may use the cash method for tax purposes. Use of the cash method allows qualifying farming businesses to pay taxes only on the income they have actually collected, thus helping cashflow, while still maintaining their books on an accrual basis for financial statement presentation, to better assess their financial position.

Help is also available under Sec. 447(d)(2) for family-owned farming businesses with gross receipts of $25 million of less, but specific requirements must be met.

Production Period

Other tax benefits are available for certain products produced by a farming business and the preproduction costs inherent in the farming industry. Sec. 263A generally requires capitalization of (1) direct costs and (2) an allocable portion of the indirect costs that directly benefit or are incurred in the production of such property. The direct and indirect costs of producing plants generally include preparatory costs allocable to the plants and the preproductive-period costs.

However, an...