If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. This record should show the actual count or measurement of the inventory. It should also show all factors that enter into its valuation, including quality and weight. Below are some items that could be included in inventory.
Hatchery business. If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation.
Products held for sale. All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc., must be included in inventory.
Supplies. Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Deduct the cost of supplies in the year used or consumed in operations. Do not include incidental supplies in inventory as these are deductible in the year of purchase.
Livestock. Livestock held primarily for sale must be included in inventory. Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes.
Growing crops. Generally, growing crops are not required to be included in inventory. However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop.
Uniform capitalization rules. The following applies if you are required to use an accrual method of accounting.
- The uniform capitalization rules apply to all costs of raising a plant, even if the preproductiveperiod of raising a plant is 2 years or less.
- The costs of animals are subject to the uniform capitalization rules.
Note. If a farming business has average annual gross receipts of $26 million or less for the 3 preceding tax years and is not a tax shelter, the farm is not subject to the uniform capitalization rules.