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Uniform Capitalization Rules

The uniform capitalization rules, so-called "unicap rules," require certain taxpayers to capitalize instead of expense the direct and some portion of indirect costs of producing real or tangible personal property for:

1. use in a for-profit activity of the taxpayer, or
2. (2) for sale to customers in such an activity, IRC Sec. 263A. They also apply to real or personal property (tangible or intangible) acquired for resale by taxpayers with annual gross receipts of more than $10 million.

Timber and the land underlying it is excluded from the unicap rules IRC Sec. 263A(c)(5). The exclusion also applies to Christmas trees as defined under IRC Sec. 631(a) and (b); i.e. evergreen trees more than 6 years old when severed from the roots and sold for ornamental purposes. The unicap rules do apply to the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees (except as defined in IRC Sec. 631(a) and (b)). This means the unicap rules apply to fruit and nut orchards.

The application of the unicap rules to black walnut and similar species grown in plantations is clear-cut. If the taxpayer's primary purpose for the plantation is to produce nuts to be sold to processors or to be processed by the taxpayer, the activity should be treated as a nut orchard subject to the unicap rules. If the taxpayer's primary purpose for the plantation is to produce sawlogs or veneer logs the trees qualify as timber and the activity is excluded from the unicap rules. The fact that the timber trees also produce some quantity of nuts which can be sold or processed by the taxpayer should not be determining. The taxpayer's intent should be easily determined by the planting stock used, spacing of the trees, and pruning techniques used. A taxpayer would be ill advised to establish a plantation for timber purposes and then convert it to a nut plantation. Although this may technically avoid the unicap rules the taxpayer would be sacrificing nut income by planting the wrong genetic selections at too close a spacing for optimal nut production.