Reforestation Tax Incentives

This next section is on the
reforestation tax incentives.

These have gone through a major change
as of October 22nd,

and so we're still in the midst
of getting the final

guidance from the IRS on the...

the law that was passed
on October 22nd.

So what we've done with this presentation
is kind of combined

showing the old stuff and the new stuff,

because part of the new law is
anything before- anything that was-

any reforestation activities done
October 22nd or earlier

is still eligible for the older

rules.

And anything October 23rd and beyond,
the day after the law was signed

is under the new provisions.

In the presen- in the presentation
that you got in your PowerPoint

has 21st and 22nd are the two days,
it's actually shifted up one day.

We- we thought that the law

pertained to the day it was signed,
but it actually started the next day.

So the old provisions are covered in
the ag handbook that you all have there,

and then got a revenue ruling,
and then the Jobs Creation Act-

as American Jobs
Creation Act is actually

what the law that was signed
October 22nd was called.

So the reforestation tax incentives.

These are incentives provided by the IR-
in the Internal Revenue Code to reduce

or eliminate the need to hold expenses
that are associated with reforestation-

or afforestation-

in your capital account until you sell
the timber or timber products.

And as I just said, the..

American Jobs Creation Act
changed the nature of these incentives.

So for reforestation done
October 22nd or earlier,

you can take a 10% reforestation
investment tax credit on and amortize,

write off up to the $10,000 of qualifying
expenses per year over eight tax years.

So for reforestation done on October
23rd or later for last year,

you deduct outright the first $10,000
per year of qualifying expenses

and then amortize any additional amount
over the eight tax years.

So as with all of these, who is eligible?

It's tax payers, estates, partnerships,
corporations are eligible for both

the older tax credit and
amortization provisions,

but trusts are not eligible for either.

And then for the new

the new provisions, individual taxpayers,
partnerships and corporations

are eligible for both the new deduction
and amortization provisions.

But, estates are only eligible
for the amortization,

and trusts are
still not eligible for either.

So what qualifies?

Reforestation on tracks that are
at least one acre in size,

located in the United States,

held to produce commercial timber
products, and again,

this includes practices to
encourage natural regeneration.

You know, the presentations
have been in, you know, like it's

I mean, you don't have to plant a tree
to qualify for these expenses.

Scarification of the soil, burning,
you know, whatever.

If you're actually doing this activity
to encourage regeneration,

those expenses involved can count.

So reforestation expenses
reimbursed under

an approved public cost-share program
that you do not elect

to exclude from your taxable
income and cost-share expenses in

what can be- how to get your excludable
amounts is the next presentation.

So until 2003-

this was part of the revenue ruling update
that was listed at the beginning-

this always included
CRP cost-share payments

because all CRP payments
had to be included in gross income.

But, the revenue ruling 20- 2003-59 is now
you can exclude cost-share payments

from gross income
as long as it's not the rental

or incentive payment that under
some parts of the CRP program.

And then under
the Internal Revenue Code section 175,

you can deduct tree planting expenses
paid using a CRP cost-share

to a limit of 25% of your
income from farming.

So what does not qualify
for your reforestation?

Christmas trees, shelter belts,
windbreaks, nut trees,

meaning you're growing for the nut
you're growing for walnuts or whatever.

If you're growing walnut trees
for the timber, and you get walnuts

as a side benefit that, you know,
that just grows because it's a walnut tree

It still counts as long as
you're growing the walnut trees

for the timber.

Fruit trees and ornamentals.

Now back to what qualifies,
one acre-

a land or forest that's
one acre in size or larger.

You know, shelter belts
and windbreaks are here.

If instead of planting this row
shelter belt, you have an acre wide,

as Lloyd has said before,
how wide is an acre?

But you know, like 200ft,
250ft wide shelter belt

that you have as- in, you know,
you have it for your length of whatever,

and you grow your commercial
timber in there,

as, you know, that's the point
of that one acre wide strip.

At least an acre.

But then a side benefit is-

is it's providing a windbreak to the
farmhouse, to the fields, the whatever.

So because, you know,

you always need wood around the farm,
any fence posts, you know, other items.

So you actually growing this windbreak
for commercial timber

and you state it as it's
a commercial timber forest,

but you're getting the benefit
of the windbreak also.

And then what does not qualify
also is the reforestation expenses

that are reimbursed under an approved
public cost share program that you elect

to exclude from your taxable income
and the cost of intermediate treatments.

So here's a summary of the older
incentives for anything

that was done before October 22nd-

October 22nd or before 2004.

First there was
a reforestation investment tax credit

net equal to 10% of your qualifying
reforestation or afforestation expenses

up to $10,000 in a year.

So your maximum-
it was actual tax credit-

you could get was $1,000
and it was not a deduction,

it's, you actually get a $1,000 reduction
in your taxes or whatever.

But part or all of the credit
is subject to recapture

if you dispose of the trees
within five years.

And if you dispose of the trees
within the first f- you have-

you have to give it all-
the tax credit back, all back,

if you dispose of it within
the first year, and then a 20% reduction.

So 80% the second year, 60% the third year

until after the fifth year, then
it's just- don't have- not part of that.

And there is an exception

is if it's because of transfer at death.

So you take the credit on
Form 3468, part one.

And then also for tax years
beginning after 1997,

any unused credit is carried
back to the return for the preceding year,

then forward to the returns for the
next 20 years until it's used up.

And for tax years beginning before 1998,

any unused credit was carried back
to returns for the three preceding years,

and then forward to returns
for the next 15 years.

So the tax credit goes on
3468 under part one, line three,

has the reforestation credit.

So you put in the amount times the 10%.

And so the example here is they
put in the full $10,000

times the 10% to get the $1,000 tax credit

for the reforestation.

So continuing on with
the older incentives,

there was also the reforestation
amortization part.

And that was you can
amortize any direct expenses

incurred in establishing a stand of timber
to a maximum of $10,000 per year,

or $5,000 if you're
married filing separately.

And then you reduce
the amount amortized by half

for any reforestation
investment tax credit that you took.

The amortization period is
nominally 84 months, seven years,

but half year convention applies.

This means that the first year
that you claim it, you only claim a 14th

of the amount, and then you get
a seventh of the deduction

for the next six years,
years two through seven.

And then in the eighth and final year,
you take that last 14th

that was the other half of
the seventh from the first year.

And you can amortize reforestation
expenses from two or more years

at the same time, you just maintain
a separate schedule for each event

and then report the amounts on
Form 4562, part six

according to the instructions.

So any tax saved by amortization
is again, subject to recapture.

But this time it's
if it's disposed of within ten years.

Disposals by gifts are excepted.

Like-kind exchanges,
involuntary conversions,

tax free transfers, transfers of death

are also generally excepted
from being recaptured.

Also, you must specifically elect
to amortize reforestation expenses

in a timely file return for the tax year
in which they are incurred,

and make the election
and report the amount of deductions

taken on Form 4562, part six.

And you cannot make the election
on an amended return.

But once it is made, you can take

amortization deductions
that you have forgotten about.

In back in the tax forms,
there was 4562, part six.

So it was part six and it was
way down here at the bottom,

you know, part six is amortization.

And so you explain what you're amortizing.

Qualifying reforestation costs, the date,

and the amortiz- amortizabable.

I can't say the word right.

The amount that you're doing
and what code it's in.

And this is- this is
what's always gotten me.

Is seven- a seventh- one seventh is

.1- is like .14 percentage wise,
and a 14th is like point .7%.

So, or the other way around,
one seventh is 14%.

And one- the 14th year
or the 14th amount is 7%.

Anyway, so that's your 14th of the amount.

So you get $679

for that 1/14.

You take the amortization deduction.

Where you take it depends
on how you hold your forest.

If it's held as an investment,
it's on form 1040

under the adjustment income line,
and write in RFST, reforest,

and the amount.

If it's part of a trade or business,
you report it on schedule C

and the other expenses line
and explain on page two.

And if it's part of a farm, report it on
schedule F under the other expenses line.

So, that was the summary
of the older expenses.

So now we go to the new incentives.

The new incentive says you can deduct
any direct expenses incurred

establishing a standard timber
to a maximum of $10,000 per year,

$5,000, again,
if you're married filing separately.

And then amortize expenses over
$10,000 per year as described above

So we lost the tax credit.

Or the tax credit was lost,
I shouldn't say we, I don't own-

I don't own forest land.

So comparative examples.

Say you reforested 80 acres last year

at a cost of $175 per acre,

or $14,000 in all.

You received
no cost-share payment,

So your total expense
is more than $10,000.

So calculate the reforestation incentives
that you're eligible for.

First thing that was here

is the first mistake a person
made is they spent over $10,000.

If you can plan it out
and spend $10,000 in one year,

and then $10,000 in the next
in a separate stand.

So with the older incentives,
the reforestation

done October 22nd, or earlier,

when you're filling out the tax forms,

you only- you got- you
capitalized amount over $10,000.

And in this example that was
4,000 because it was 14,000 total.

And then you can claim a tax credit
of $1,000 on the 10,000 amount.

And then the amorti-
amortizable amount,

you got the 14th, which was the 679,
which was on the form is on the overhead.

And then for the next return years,

for the next six years,
you get 1357 that you can amortize

and then the eight year
you get that last 14th of the amount.

So under the new incentives

for any reforestation done
October 23rd and beyond,

you deduct outright the first
$10,000 of your expenses

and then beginning the write off
of your amortizable amount.

Then for your returns for the next
few years, you got the seventh

one seventh of the amount,

and then the eighth
year you get the 14th again.

So there's other reforestation

strategies that would enable you to better
utilize the reforestation incentives.

For example, as I said before,
you can divide the reforestation

operation and expenses
between two tax years.

And you can also use excludable
cost-share payments

to bring your direct expenses
below $10,000.

But remember, you should base your forest
management decisions on what is-

on a full silvicultural, financial,
and planning implications,

not just their tax effect.

Is there any question on reforestation?