The following article is adapted from reprinted from the M&A Tax Report, Vol. 7, No. 12, July 1999, Panel Publishers, New York, NY.


By Robert W. Wood, San Francisco

Yes, capitalizing the cost of plants, and we don't mean factories. We mean "plant" plants. Potted plants, garden plants, and so on. A technical advice memorandum has just ruled that a nursery must capitalize the cost of plants purchased for immediate resale, but may currently deduct the cost of plants purchased for further development and cultivation before sale. In Technical Advice Memorandum 199921046, 1999 TNT 104-13, the IRS considered a large nursery operating a greenhouse facility. The major question was whether the nursery was properly accounting for matters by deducting the costs of all of its plants. It purchased plants in various stages of development from an initial grower, but did grow some plants from its own cuttings and seeds, and purchased other plants in their ultimate containers and ready for immediate resale. The nursery did not elect to use the crop method of accounting and also did not elect to apply the capitalization rules of Section 263A to plants produced in a farming business.

The Service concluded that the nursery did engage in both farming and resale activities and therefore could not account for all of its plants under the farming rules. The nursery had to account for the plants that it merely buys and resells under the non-farming resale rules under Section 263A. The nursery was not required to capitalize the acquisition costs or preproductive period expenses of the seeds and young plants it acquires for further cultivation and development.

Maybe there will be an incentive to buy plants that need a little watering and development!

Capitalizing Plant Costs?, Vol. 7, No. 12, The M&A Tax Report (July 1999), p. 8.