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§ 25128-2. Agricultural Business Activity.

18 CA ADC § 25128-2Barclays Official California Code of Regulations

Barclays California Code of Regulations

Title 18. Public Revenues

Division 3. Franchise Tax Board

Chapter 3.5. Bank and Corporation Tax (Refs & Annos)

Subchapter 17. Allocation of Income

Article 2.5. Uniform Division of Income for Tax Purposes Act

18 CCR § 25128-2

§ 25128-2. Agricultural Business Activity.

Currentness

(a) In general. Revenue and Taxation Code section 25128, subdivision (c), defines “qualified business activity” and includes “agricultural business activity” in that term. This regulation defines “agricultural business activity” and what constitutes gross business receipts from such activity.

(b) Definitions.

(1) Section 25128, subdivision (d)(2), of the Revenue and Taxation Code sets forth the statutory definition of “agricultural business activity.” In general, the term applies only to taxpayers engaged in “the business of farming” as defined in Treasury Regulation section 1.175-3 and includes only activities encompassed within “the business of farming” as so defined.

(2) For purposes of Revenue and Taxation Code section 25128, subdivision (d)(2), and this regulation, the term “farm” is used in its ordinary and accepted sense, and generally means land used for the production of crops, fruits, or other agricultural products or for the sustenance of livestock or poultry. The term “livestock” includes cattle, hogs, horses, mules, donkeys, sheep, goats, and captive fur-bearing animals. The term “poultry” includes chickens, turkeys, geese, ducks, emus, ostriches, and pigeons. Thus, a farm includes livestock, dairy, poultry, fish, fruit, fur-bearing animal, and truck farms, plantations, ranches, nurseries, ranges, orchards, feed yards for fattening cattle, and greenhouses and other similar structures used primarily for the raising of agricultural or horticultural commodities. Greenhouses and other similar structures that are used primarily for purposes other than the raising of agricultural or horticultural commodities do not constitute farms, as, for example, structures that are used primarily for the display, storage, fabrication, or sale of wreaths, corsages, and bouquets. A fish farm is an area where fish are grown or raised, as opposed to merely caught or harvested.

(3) Wherever the definition of agricultural business activity in this regulation refers to the production of a product, the term “production” means planting, growing, breeding, raising or fattening one's own agricultural commodity. Production includes processing activities which are normally incident to the growing, raising, planting, breeding, or fattening of agricultural products. For example, assume an apportioning trade or business is in the business of growing and selling fruits and vegetables. When the fruits and vegetables are ready to be harvested, the business picks, washes, inspects, and packages the fruits and vegetables for sale. Such activities are normally incident to the raising of these crops by farmers. The receipts from the sale of these fruits and vegetables are gross business receipts from a qualified agricultural business activity. The term production does not include the processing of agricultural products beyond those activities which are normally incident to the production of such products according to industry practice.

Example 1: The processing of grain that a company has grown and harvested in order to produce flour, breads, cereals, and other similar food products, and the sale of the processed products do not constitute agricultural business activity.

Example 2: The processing of grapes into wine, regardless of the source of the grapes, and the sale of such wine do not constitute agricultural business activity.

Example 3: The processing of nuts by shelling and the sale of such processed nuts do not constitute agricultural business activity. Example 4: A farmer raises cattle, slaughters the cattle, and sells the carcasses. Slaughtering cattle and the sale of their carcasses do not constitute agricultural business activity.

(1) The production of crops, plants, vines and trees (excluding forestry operations or the growing of timber). This category also includes the operation of sod farms and cranberry bogs; the production of mushrooms, bulbs, flower seeds, and vegetable seeds; and the production of hydroponic crops. Specific activities in this category include the following:

(A) The production of wheat; rice; field corn for grain or seed; sweet corn; popcorn; soybeans; and other cash grains, including production of dry field and seed peas and beans, safflowers, sunflowers, barley, buckwheat, cowpea, flaxseed, lentil, milo, mustard seed, oat, rye, and sorghum.

(B) The production of field crops, including cotton, cottonseed, tobacco, sugarcane, sugarbeets, potato, alfalfa, broomcorn, clover, grass seed, hay, hop, mint, peanut, sweet potato, timothy, yam, other roots, and tubers.

(C) The production of vegetables and melons, including asparagus, bean, beet, bok choy, broccoli, cabbage, cantaloupe, cauliflower, celery, cucumber, English pea, green lima bean, green pea, lettuce, market gardens, onion, pepper, romaine, snap bean, squash, tomato, and watermelon. This category also includes truck farms.

(D) The production of fruits and tree nuts, including berry crops, such as blackberry, blueberry, cranberry, currant, dewberry, loganberry, raspberry, and strawberry; grapes; tree nuts, including almond, filbert, macadamia, pecan, pistachio, and walnut; citrus fruits, including grapefruit, lemon, lime, orange, and tangerine; deciduous tree fruits, including apple, apricot, cherry, nectarine, peach, pear, persimmon, plum, pomegranate, prune, and quince; avocado; banana; coffee; date; fig; kiwi; olive; pineapple; plantain; and tropical fruits.

(E) The production of ornamental plants and other nursery products, such as bulbs, florist's greens, flowers, shrubbery, flower and vegetable seeds, and plants and sod. These products may be grown under cover or outdoors.

(F) The production of food crops grown under cover, such as mushrooms, bean sprouts, fruits, greenhouse crops, hydroponic crops, mushroom spawn, rhubarb, seaweed, tomatoes, truffles, and vegetables grown under cover.

(2) The keeping, grazing, or feeding of livestock for the sale of livestock or livestock products. Businesses engaged in these activities include farms, ranches, dairies, certain feedlots as specified in subparagraph (A) of this paragraph, egg production facilities, poultry hatcheries, and apiaries. Livestock includes cattle, hogs, sheep, goats, poultry (including emus and ostriches), horses, rabbits, bees, pets, fish in captivity, and fur-bearing animals in captivity. “Livestock products” means products which come directly from the livestock without processing, such as serums. Activities included in this general category include the following:

(A) The fattening of beef cattle in a confined area for a period of at least 30 days. Business activities which consist of feeding beef cattle for periods of less than 30 days, in connection with their transport, are not included.

(B) The production or feeding of beef cattle, such as beef cattle farms, cattle raising farms, and cattle ranches.

(D) The production of sheep, lambs, goats, goats' milk, wool, and mohair. This includes the fattening of lambs in a confined area (in feedlots) for a period of at least 30 days. The feeding of lambs for periods of less than 30 days, in connection with their transport, is not included.

(3) The production of cows' milk and other dairy products and in raising dairy heifer replacements.

(4) The production of poultry and eggs. This category includes the following:

(A) The production of chickens for slaughter, including Cornish hens.

(B) The production of turkeys and turkey eggs.

(D) The production of poultry and eggs, not elsewhere included, on duck farms, emu farms, ostrich farms, egg (from other than chicken or turkey) farms, geese farms, pheasant farms, pigeon farms, quail farms, and squab farms.

(5) The production of animal specialities. This includes the production of the following:

(A) Fur and fur-bearing animals and rabbits, including chinchilla, fox, game, and mink;

(B) Horses and other equines, including burros, donkeys, mules, and ponies;

(C) Finfish and shellfish, such as crustaceans and mollusks, within a confined space and under controlled feeding, sanitation, and harvesting procedures, such as on catfish farms, fish farms, goldfish farms, minnow farms, tropical aquarium fish farms, and trout farms; and

(D) Other animal specialties, (including the products thereof), such as pets, bees, worms, and laboratory animals.

(6) Under section 25128, subdivision (d)(2), of the Revenue and Taxation Code, the following are also included in the definition of agricultural business activity:

(A) Cultivating the soil, or raising or harvesting any agricultural or horticultural commodity;

(B) Raising, shearing, feeding, caring for, training, or management of animals on a farm; and

(C) Handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity handled, dried, packed, graded, or stored.

The more-than-one-half test set forth in this subsection (C) and in section 25128, subdivision (d)(2), of the Revenue and Taxation Code applies only to service receipts from outside the apportioning trade or business and does not apply to the apportioning trade or business's self-produced agricultural products. For example, if a farming corporation stores both its own and other corporations' agricultural products on its farm premises, and it self-produces over 50 percent of the agricultural products stored there, then the entire proceeds received from the third parties (outside of the apportioning trade or business) for providing storage services would be included as gross business receipts from an agricultural business activity. However, if the farmer self-produces less than 50 percent of the products stored, the receipts from services to third parties will not qualify as gross business receipts from an agricultural business activity. The amounts received from the sales of the self-produced agricultural products which had been stored by the farmer on its farm would still qualify as gross business receipts from an agricultural business activity.

(d) Businesses which are not engaged in agricultural business activity.

Trades or businesses engaged in performing services for others on a contract or fee basis are not engaged in an agricultural business activity for purposes of section 25128 of the Revenue and Taxation Code unless they are engaged in the business of farming as defined in Treasury Regulation section 1.175-3.

Example: A is a company whose business is soil preparation. A contracts with B, a farming corporation, to provide soil preparation services on B's farmland. A breaks the land, plows, fertilizes, prepares the seed bed and performs other related services for improving the soil for crop planting. B pays A a fee for the soil preparation services it performs. A has no interest in the land or in the crops. A is not engaged in a qualified agricultural business activity. B, however, is engaged in a qualified agricultural business activity.

(e) Gross business receipts from agricultural business activity.

(1) Only gross receipts derived by an apportioning trade or business from agricultural business activity as defined in this regulation shall be considered to be gross business receipts from a qualified agricultural business activity for purposes of section 25128 of the Revenue and Taxation Code. Except as provided in paragraph (3) of this subsection, gross receipts from sales of produce which were not produced by the apportioning trade or business are not gross business receipts from agricultural business activity.

Example: If X, a farming corporation, purchases peaches from an unrelated farming business which has produced the peaches, the resale of those peaches by X will not give rise to gross business receipts from an agricultural business activity. X did not produce the peaches; therefore, the sales were not derived from a qualified agricultural business activity, as defined in section 25128 of the Revenue and Taxation Code and this regulation, conducted by X.

(2) If an apportioning trade or business sells products produced from its qualifying agricultural business activity and also sells products purchased from another party, tracing will generally be required to determine which portion of the total receipts is from its qualified agricultural business activity and which portion is not. In some cases, tracing may be difficult because records are not available and cannot reasonably be obtained. In such cases, reasonable estimates will be acceptable.

(3) Exchanges. Exchanges are an exception to the requirement that the product sold must be derived from the apportioning trade or business's own qualified agricultural business activity as set forth in subsection (e)(1) of this regulation. If products produced by an apportioning trade or business's qualified agricultural business activity are exchanged for similar products owned by parties outside of the apportioning trade or business, the subsequent sale of the products received in the exchange shall be treated as arising from the apportioning trade or business's qualified agricultural business activity to the extent the exchange itself has not previously been reflected in the calculation of the business's qualified agricultural business activity.

(f) Cooperatives.

(1) Agricultural associations organized and operated on a cooperative or mutual basis (as set forth in section 24404 of the Revenue and Taxation Code) are not engaged in a qualified agricultural business activity because the association itself, which is a separate entity from its members, does not conduct an agricultural business activity as defined in section 25128 of the Revenue and Taxation Code and this regulation.

(2) Gross receipts from sales to cooperatives of products produced in the conduct of a qualifying agricultural business activity by an apportioning trade or business constitute gross business receipts from a qualified business activity. Example: If a farming corporation sells artichokes it has grown to a non-unitary cooperative, the gross receipts from the sales of the artichokes are gross business receipts from a qualified business activity.

(g) Patronage Dividends. For purposes of determining gross business receipts from an agricultural business activity, patronage dividends (as defined in section 24404 or section 24273.5 of the Revenue and Taxation Code) from agricultural cooperatives shall not be included in the producer's receipts as gross business receipts from an agricultural business activity.

Credits

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25128, Revenue and Taxation Code.