Automatic Accounting Method Change for Deducting Citrus Replanting Costs

An automatic change in accounting method procedure provides guidelines for qualifying investors in damaged citrus groves to opt out of the uniform capitalization (UNICAP) rules of Code Sec. 263A. The damage may be caused by freezing temperatures, disease, drought, pests, or casualty. If the accounting method change is adopted, the investor’s costs of replanting are currently deductible.

This tax break, which will help citrus growers obtain necessary financing to replant, was provided by the Tax Cuts and Jobs Act of 2017 ( P.L. 115-97). However, the exemption from UNICAP only applies to costs paid or incurred during the 10-year period beginning after December 22, 2017, and ending on December 22, 2027 ( Code Sec. 263A(d)(2)(C), as added by P.L. 115-97).

Who Qualifies?

An investor may make this accounting method change to qualify for the UNICAP exemption if one of the following requirements is satisfied:

  • the farmer (i.e., owner of the damaged citrus grove) retains at least a 50 percent equity interest in the replanted citrus plants; or
  • the investor acquires the farmer’s entire equity interest in the land on which on which the damaged citrus plants are located, and the replanting is on that land.

Making the Method Change

This change is made on a “cut-off” basis. Consequently, only replanting expenses paid or incurred after December 22, 2017, and before the tax year of change result in a Code Sec. 481(a) adjustment deduction. For example, if a calendar-year taxpayer files this change for their 2018 tax year, only replanting expenses paid or incurred after December 22, 2017, and before January 1, 2018, result in a Code Sec. 481(a) adjustment.

Replanting expenses paid or incurring during 2018 (or later tax years within the 10-year exemption period) are simply deducted as a business expense on the 2018 tax return as allowed by the method change.

The “eligibility rule” of section 5.01(1)(f) of Rev. Proc. 2015-13, I.R.B. 2015-5, 419, which prevents a taxpayer from filing the same accounting method change more than once during a five-year period, is waived.

Rev. Proc. 2018-31, I.R.B. 2018-22, 637, which provides a list of all automatic accounting method changes, is modified to add a new section 12.15, entitled “Change to not apply Code Sec. 263A to replanting costs for lost or damaged citrus plants pursuant to §263A(d)(2)(C).” The designated change number is “232.”