Do not deduct the following.
- Personal or living expenses (such as taxes, insurance, or repairs on your home) that do not produce farm income.
- Expenses of raising anything you or your family used.
- The value of animals you raised that died.
- Inventory losses.
- Personal losses.
If you were repaid for any part of an expense, you must sub-tract the amount you were repaid from the deduction.
Capitalizing costs of property. If you produced real or tangi-ble personal property or acquired property for resale, certain expenses must be included in inventory costs or capitalized. These expenses include the direct costs of the property and the share of any indirect costs allocable to that property. However, these rules generally do not apply to expenses of:
- Producing any plant that has a preproductive period of 2 years or less,
- Raising animals, or
- Replanting certain crops if they were lost or damaged by reason of freezing temperatures, disease, drought, pests, or casualty.
Exceptions (1) and (2) do not apply to tax shelters, farming syndicates, partnerships, or corporations re-quired to use the accrual method of accounting under section 447 or 448(a)(3).
If you capitalize your expenses, do not reduce your deduc-tions on lines 10 through 32e by the capitalized expenses. In-stead, enter the total amount capitalized in parentheses on line 32f (to indicate a negative amount) and enter "263A" in the space to the left of the total. See Preproductive period ex-penses, later, for details.
But you may be able to currently deduct rather than capital-ize the expenses of producing a plant with a preproductive peri-od of more than 2 years. See Election to deduct certain prepro-ductive period expenses, next.
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 in-curred 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 prepro-ductive period expenses in the first tax year for which you can make this election and by applying the special rules, discussed later.
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 shel-ters, farming syndicates, partnerships, or corporations re-quired 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 capitaliza-tion rules. You cannot revoke this election without IRS con-sent.
Special rules. If you make the election to deduct prepro-ductive expenses for plants:
- Any gain you realize when disposing of the plants is ordi-nary 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 Uniform Capitalization Rules in chapter 6 of Pub. 225.
Prepaid farm supplies. In most cases, if you use the cash method of accounting and your prepaid farm supplies are more than 50% of your other deductible farm expenses, your deduc-tion for those supplies may be limited. Prepaid farm supplies include expenses for feed, seed, fertilizer, and similar farm sup-plies not used or consumed during the year.
They also include the cost of poultry that would be allowa-ble as a deduction in a later tax year if you were to:
- Capitalize the cost of poultry bought for use in your farming business and deduct it ratably over the lesser of 12 months or the useful life of the poultry, and
- Deduct the cost of poultry bought for resale in the year you sell or otherwise dispose of it.
If the limit applies, you can deduct prepaid farm supplies that do not exceed 50% of your other deductible farm expenses in the year of payment. You can deduct the excess only in the year you use or consume the supplies (other than poultry, which is deductible as explained above). For details and excep-tions to these rules, see chapter 4 of Pub. 225.
Whether or not this 50% limit applies, your expenses for livestock feed paid during the year but consumed in a later year may be subject to the rules explained in the line 16 instructions.