Election to deduct certain preproductive period expenses.
If the preproductive period of any plant you produce is more than 2 years, you can elect to currently deduct the expenses rather than capitalize them. But you cannot make this election for the costs of planting or growing citrus or almond groves that are incurred before the end of the fourth tax year beginning with the tax year you planted them in their permanent grove. You are treated as having made the election by deducting the preproductive period expenses in the first tax year for which you can make this election and by applying the special rules discussed later.
Caution - in the case of a partnership or S corporation, the election must be made by the partner, shareholder, or member. This election cannot be made by tax shelters, farming syndicates, partnerships, or corporations required to use the accrual method of accounting under section 447 or 448(a)(3).
Unless you obtain IRS consent, you must make this election for the first tax year in which you engage in a farming business involving the production of property subject to the capitalization rules. You cannot revoke this election without IRS consent.
Special Rules
If you make the election to deduct preproductive expenses for plants:
-
Any gain you realize when disposing of the plants is ordinary income up to the amount of the preproductive expenses you deducted, and
-
The alternative depreciation rules apply to property placed in service in any tax year your election is in effect.
For details see IRS Pub. 225 and IRS Instructions for Schedule F.