Treatment of expenses for Hop Farm

[Hamacher]

I have a client that just started a Hop Farm. They are being taxed as a Parternship. I am trying to determine if they will need to capitalize or put into inventory any of the expenses related to the plants. In 2012, they incurred some significant expenses but have very little income. Based on some research I've done, it appears they can write off all their expenses as they are incurred. Is that correct or do they have to capitalize the initial plant expense? What about other expenses related to the planting and care of the plants (i.e. wages, etc.)?

Thanks in advance for your help!

[DaveO]

I would say deduct. Any plant with a preproductive period of less than two years may be expensed. While hops don't produce much the first year they will produce a small crop. The poles and netting could be expensed but it might be to their advantage to depreciate. With the wholesale price of hops north of $7 per pound and a serious shortage we are likely to see more hop farms pop up.

[Roland Slugg]

There are several special rules for farming businesses/operations. The uniform capitalization rules generally don't apply to farmers whose crops have a pre-production period of less than two years. I'm not sure about hops, but I would guess they take less than two years to produce a marketable crop. Even if the capitalization rules do apply to hops, a farmer can elect to have them NOT apply. (Code §263A(d)(3)(A))

[Hamacher]

Inventory treatement

So from I can tell they do not have to maintain an inventory account at all. Correct? That sure will make my client happy. He was hoping to offset some of his other earnings with the money he put into the hop farm. Do they have to make an election not to follow uniform cap rules?