Introduction
(a) Introduction(1) In general. This section provides guidance with respect to the application of section 263A to property produced in a farming business as defined in paragraph (a)(5) of this section. Except as otherwise provided by the rules of this section, the general rules of 1.263A-1 through 1.263A-3 and 1.263A-7 through 1.263A-15 apply to property produced in a farming business. A taxpayer that engages in the raising or growing of any agricultural or horticultural commodity, including both plants and animals, is engaged in the production of property. Section 263A generally requires the capitalization of the direct costs and an allocable portion of the indirect costs that directly benefit or are incurred by reason of the production of this property. The direct and indirect costs of producing plants or animals generally include preparatory costs allocable to the plant or animal and preproductive period costs of the plant or animal. Except as provided in paragraphs (a)(2), (a)(3), and (e) of this section, taxpayers must capitalize the costs of producing all plants and animals unless the election described in paragraph (d) of this section is made. (2) Exception(i) In general. Section 263A does not apply to the costs of producing plants with a preproductive period of 2 years or less or the costs of producing animals in a farming business, if the taxpayer is not (A) A corporation or partnership required to use an accrual method of accounting (accrual method) under section 447 in computing its taxable income from farming; or (B) A tax shelter prohibited from using the cash receipts and disbursements method of accounting (cash method) under section 448(a)(3). (ii) Tax shelter(A) In general. A farming business is considered a tax shelter, and thus a taxpayer prohibited from using the cash method under section 448(a)(3), if the farming business is