Depreciation of Fruit and Nut 

 Trees and Vines 



The difference between date purchased 

 and date placed in service is important. 

 Example: Andy Mcintosh purchased an 

 orchard of two-year-old apple trees in 1995 and 

 paid $20,000. He has $2,000 of pre-production 

 expenses. The trees are expected to produce 

 their first fruit in 1997. Andy will begin 

 depreciating the orchard in 1997 (as long as he 

 harvests some fi-uit) the year placed in service. 

 He can use straight-line depreciation over a 10- 

 year life under MACRS or over the alternative 

 MACRS life of 20 years. (If he elected out of 

 capitalizing pre-production expenses he must 

 use the alternative 20-year life. [IRC 

 §263A(d)(3)].) Note that Andy can claim up to 

 $18,000 section-179 expense deduction if the 

 trees are placed in service in 1997. [IRC 

 §179(d)(l), IRC §1245(a)(3)]. 



Capitalization of Nursery Stock 



Conflict exists on the rules of whether 

 production costs must be capitalized or may be 

 deducted as current expenses. Pre-productive 

 costs of plants with a pre-productive period of 

 more than two years must be capitalized [IRC 

 §263A]. This is partly a question of intent. For 

 example, it is hard to conceive that a Christmas 

 tree would be sold after such a short period. 

 However, if plants (e.g., ornamental trees or 

 shrubs) have reached a marketable size and 

 stage of development and the market value is 

 known, then the maintenance costs are 

 currently deductible. Other than for Christmas 

 trees, current deductibility of costs would seem 

 to apply to every plant produced by a nursery. 



Sale of Farm with Retained 

 Use of the Home 



Selling a principal residence while retain- 

 ing the right to live there (a retained life estate) 

 precludes you from claiming the exclusion for 

 gain of sale of a principal residence. Example: 

 Florence Hadley, a 70-year-old widow, sold her 

 farm, including the house, but retained the 

 right to live in the house for the rest of her life. 



The fair market value of the house at $150,000 

 exceeded the basis at time of purchase. 

 Florence has a taxable capital gain. She has 

 the right to use and benefit from the property 

 without paying rent. The sale of a principal 

 residence, for purposes of claiming the capital- 

 gains exclusion, is accomplished only when the 

 benefits and burdens of ownership are 

 transferred to the purchaser. [Roy vs. 

 Commissioner, T.C. Memo 1995-23 (January 

 18, 1995)]. 



Optional Self-employment Tax 

 for Farmers 



You may have a very small amount of self- 

 employment income. However, you might want 

 to report more farm income than you actually 

 made, in order to qualify for certain social- 

 security benefits, to claim credit for child-care 

 or dependent expenses, or to increase the 

 amount of earned-income credit. You would use 

 the farm-optional method of reporting self- 

 employment income. 



A materially participating farmer can 

 elect to use the farm-optional method if either 

 (a) taxpayer's gross farm income is $2,400 or 

 less, in which case the taxpayer can report 2/3 

 of the gross farm income as net farm self- 

 employment income or (b) taxpayer's gross 

 farm income exceeds $2,400 but net farm 

 profits are less than $1,733, in which case 

 taxpayer reports $1,600 as net farm self- 

 employment income. The election can be used 

 an unlimited number of times. [IRC §1402 (a)]. 

 The provisions allow a taxpayer to earn up to 

 two quarters of coverage per year for social 

 security purposes. (In 1996, $640 of net self- 

 employment income is required to earn one 

 quarter of coverage). Check your past 

 employment history to see whether or not you 

 need the two quarters of coverage to be 

 currently insured or fully insured or both. 

 Within the social-security system, to receive 

 retirement benefits, you must be fully insured. 

 To receive disability benefits, you must be 

 currently insured. To receive survivor's 

 benefits or lump-sum death benefits, you must 

 be either fully insured or currently insured. To 



16 



Fruit Notes, Volume 61 (Number 4), Fall, 1996 



