Qualified reforestation expenditures (or afforestation in the case of planting or seeding nonforested land) paid or incurred in a tax year to a maximum of $10,000 per qualified timber property (QTP) can be immediately deducted by all taxpayers, except trusts. This provision became effective on October 23, 2004, under IRC section 194(b). The 10-percent investment tax creditfor reforestation costs ended after October 22, 2004, and is no longer available.
In the case of a married individual filing a separate return, the maximum yearly deduction is $5,000 per QTP. In the case of a partnership, the $10,000 maximum yearly deduction applies both to the partnership and to each partner; in the case of a Subchapter S corporation, it applies both to the corporation and to each shareholder. For purposes of the deduction, each QTP must have a unique stand identifier and may not be combined with any other QTP account for the purpose of calculating depletion or casualty loss deductions.
Qualified reforestation costs incurred—without limit—in excess of the annual outright deduction discussed previously can be amortized (deducted over a set period) over 84 months (actually 8 tax years), under IRC section 194(a). This treatment also has been available since October 23, 2004, and applies to all taxpayers, including trusts.
The latter can amortize all eligible costs, not only those in excess of the annual $10,000 limit per QTP. To qualify, the costs in excess of the outright deduction limits must be capitalized in a separate reforestation account for each eligible QTP. Any eligible amounts that you elect not to deduct under IRC section 194(b) may be amortized under section 194(a).
Qualified reforestation costs, for the purposes of both the deduction and amortization, are the direct expenses incurred in establishing a stand of timber—whether by planting, seeding, or natural regeneration. Expenditures for timber stand improvement (TSI) practices in established stands do not qualify for either the deduction or amortization. In general, these expenses are incurred for maintenance of the stand, however, and thus are eligible for deduction as a current expense, subject to the passive loss rules. Alternatively, they may be capitalized and deducted when the timber is cut, sold, or otherwise disposed of.
To qualify for both the deduction and amortization, the reforested or afforested property must be at least 1 acre in size and be located in the United States. The site must be held by the taxpayer for planting, cultivating, caring for, and cutting of trees for sale or for use in producing commercial timber products. Both owned and leased properties qualify.Christmas tree establishment expenditures do not qualify for either the deduction or amortization. Similarly, the costs of planting trees in shelterbelts or windbreaks, or of planting trees primarily for nut production or for sale as ornamentals, do not qualify.
Reforestation expenditures eligible for the deduction and amortization do not include costs reimbursed under a government cost-sharing program, unless the reimbursed amount is included in the recipient’s gross income. If the recipient includes the cost-sharing payment in his or her gross income, the total reforestation cost (including the amount reimbursed by the cost-sharing payment) qualifies for both provisions. Reforestation costs incurred under the CRP program, including the costsharing payments received if reported as income, are eligible for both the deduction and amortization if not deducted under IRC section 175.
You own 120 acres of timberland near your home and a second tract of 40 acres in another county 80 miles away. You reforested
100 acres of the 120 acre property during the tax year at a cost of $120 per acre, or a total cost of $12,000. In addition, you reforested the entire 40 acre tract at a cost of $100 per acre, or a total cost of $4,000. No cost-sharing payments were received for either tract.
Each of the two properties has a unique stand identifier and can be considered as a separate QTP. Therefore, when you file your
income tax return for the year in question, you can deduct outright $10,000 of the $12,000 expense as well as all of the $4,000 expense.
You elect to amortize the balance of $2,000 on IRS Form 4562, Part VI, and complete Form T (Timber), Part IV, line 4b. One-fourteenth of the $2,000 ($142.86) is deducted in the first year. During each of the next 6 years, $285.71 (one-seventh of $2,000) would be deducted, and the remaining $142.86 would be deducted in the 8th year.