IRS Gives Automatic Consent for Citrus Investors to Change UNICAP Accounting Method

The IRS will grant automatic consent for citrus investors to change accounting methods to opt out of UNICAP. An investor who makes the change can claim a current deduction for replanting damaged citrus crops.

UNICAP for Crops

The uniform capitalization (UNICAP) rules require the capitalization of many costs when a taxpayer produces or acquires property for resale. However, UNICAP does not apply to some costs for owners to replant damaged plants that produce edible crops for human consumption.

The Tax Cuts and Jobs Act of 2017 temporarily extended this UNICAP exemption to non-onwers who invest in citrus crops. This investor’s exemption applies to replanting costs when citrus crops are damaged by:

  • freezing temperatures,
  • disease,
  • drought,
  • pests, or
  • casualty.

However, this UNICAP exemption applies only to costs that the investor pays or incurs between December 22, 2017, and December 23, 2027.

Who Qualifies for UNICAP Exemption?

The citrus investor’s UNICAP exemption can apply in two situations.

First, an investor qualifies for the UNICAP exemption if the farmer who owns the damaged citrus grove retains at least a 50-percent equity interest in the replanted citrus plants.

The second situation depends on the land where the damaged citrus plants are located. The UNICAP exemption applies if:

  1. the investor acquires the farmer’s entire equity interest in the land; and
  2. the new plants are replanted on the land.

Changing the UNICAP Accounting Method

Rev. Proc. 2018-31 identifies the accounting method changes that are eligible for automatic IRS consent. It also explains the procedures taxpayers must follow. These procedures now apply to an investor’s change to opt out of UNICAP for costs to replace damaged citrus plants.

An eligibility rule normally prevents a taxpayer from filing the same accounting method change more than once during a five-year period. However, this rule does not apply to a citrus investor’s UNICAP change.

481(a) Adjustments

A change in accounting methods may allow some income to escape tax or, conversely, cause some income to be taxed twice. To avoid these outcomes, taxpayers make “481(a) adjustments” to some income items for years before or after the change.

However, a citrus investor applies the UNICAP change on a “cut-off” basis. Consequently, the investor makes a Code Sec. 481(a) adjustment only for eligible replanting expenses paid before the change takes effect.

For example, a calendar-year investor who files this change for 2018 makes a Code Sec. 481(a) adjustment only for eligible replanting expenses paid before January 1, 2018. The investor can claim a business expense deduction for replanting expenses during 2018 and other years in the 10-year exemption period.

Rev. Proc. 2018-35

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All stories by: CCHTaxGroup