Are Plants Capitalized or Expensed in Accounting?
Understand the accounting rules that determine if a plant is a long-term asset or an expense, and how treatment differs for financial and tax reporting.
Determining whether to capitalize or expense a plant is a fundamental accounting question for agricultural businesses. The answer depends on the plant’s nature and the rules being followed for financial reporting or tax purposes. This distinction directly influences a company’s balance sheet and income statement. The accounting treatment dictates how costs are recognized over time, affecting key financial metrics used by investors, lenders, and management.
The General Accounting Rule for Plants
Under U.S. Generally Accepted Accounting Principles (GAAP), a plant’s classification depends on its function. Plants used in production that are productive for more than one period are treated as long-term assets. Examples include apple orchards, grapevines, or rubber trees, which function like machinery in a factory and are therefore capitalized.
Capitalizing a plant means its initial costs are recorded as an asset on the balance sheet. The capitalized value includes the purchase price and all direct costs to bring it to a productive state, such as for planting, labor, and irrigation systems. Capitalization ceases once the plant reaches maturity.
In contrast, annual crops like wheat, corn, or soybeans are not long-term assets. These plants are grown to be harvested and sold within a single production cycle. They are treated as inventory, and their costs are expensed through the cost of goods sold when the produce is sold.
Distinguishing Capitalizable vs. Expensed Costs
Once a capitalized plant reaches maturity, the accounting for subsequent costs changes. A distinction is made between costs that enhance the plant’s value or extend its life and those that are part of routine maintenance.
Ongoing costs to maintain the plant and facilitate the harvest are expensed as they are incurred. These operational expenses include annual fertilization, pest control, and routine pruning. These activities are necessary to maintain the plant’s current level of productivity.
The produce growing on the plant, such as fruit or nuts, is accounted for separately from the plant itself. Upon harvest, this produce becomes inventory. The costs associated with this inventory, like harvesting and initial processing, are expensed when the inventory is sold.
Tax Treatment and Special Considerations
The tax treatment of plant costs, governed by the Internal Revenue Service (IRS), often differs from financial accounting rules. The Uniform Capitalization (UNICAP) rules require agricultural producers to capitalize both direct and certain indirect production costs. This means many costs that are expensed under GAAP must be capitalized for tax purposes.
The tax code provides exceptions that relieve many farmers from these rules. A key exception exists for small businesses. For 2025, businesses with average annual gross receipts of $31 million or less over the three preceding years are exempt from UNICAP. This allows these farming operations to deduct many plant-related costs in the year they are incurred.
Another exception is available to farmers who exceed the gross receipts threshold. They can elect not to apply UNICAP to plants with a pre-productive period of two years or less. For plants with a longer pre-productive period, this election comes with a trade-off: the farmer must use a less accelerated depreciation method for all farm assets placed in service during the years the election is in effect.
Depreciation and Disposal of Capitalized Plants
Once capitalized, a plant is treated like other long-term assets and must be depreciated. Depreciation is the systematic allocation of the plant’s cost to an expense over its useful life. The useful life is the estimated period the plant is expected to be productive, which can vary from a decade to several decades depending on the plant type, climate, and agricultural practices.
Businesses use a systematic method, such as the straight-line method, to record annual depreciation expense on their income statement. This expense reflects the consumption of the asset’s value over time. Consequently, the plant’s carrying value on the balance sheet—its original cost minus accumulated depreciation—decreases each year.
At the end of its productive life, a plant is disposed of, which involves its removal and replacement. The plant’s carrying value is removed from the balance sheet. Any proceeds from the disposal are compared to this value to determine if a gain or loss on disposal should be recorded.