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Reforestation Amortization — Pre October 22, 2004

Treatment of Reforestation Expenditures On or Before October 22, 2004

Generally:

A maximum of $10,000 per year of qualified reforestation expenses incurred on or before October 22, 2004 which otherwise were required to be capitalized to a plantation or deferred reforestation account, qualified for recovery as a deduction to gross income over an 84-month period. This same amount may have also qualified for a 10% investment credit (an offset against taxes owed). This was an exception to the general rule that reforestation costs, which must be capitalized, are recoverable only when the timber is sold, cut, or otherwise disposed of. The authorities for these treatments was Code Secs. 194 and 48.

Amortization:

The amortization deduction was determined by totaling the qualified expenditures for the year, restricted to a maximum of $10,000, or $5,000 in the case of a married individual filing a separate return. Amounts in excess of these limits was placed in a deferred reforestation account for recovery when the timber is cut or otherwise disposed of. If the 10% investment credit was claimed, the amount amortized had to be reduced by 50% of the investment credit taken. For example, if the 10% investment credit was taken on $10,000 (of qualified expenses) only 95% of the expenses (a maximum of $9,500) could have been been amortized. The amount attributable to the 5% reduction is permanently lost and may not be capitalized for recovery when the timber is cut or otherwise disposed of.

Calculating the Tax Credit:

(WARNING: Applied only to expenditures on or before October 22, 2004)

The reforestation investment credit was calculated by multiplying the total qualified reforestation expenses made in that year by 0.10. The $10,000 per year limit meant that the maximum credit in any one year was $1,000. The credit was claimed only for expenditures during the year in which you are claiming the credit. It was not claimed on any portion of the amortization deduction carried over from amortization schedules from previous years. You could have claimed the investment credit even if you chose not to amortize qualified reforestation expenses. The investment credit could not be claimed on the portion of the equipment costs allocated to reforestation projects if the credit was claimed when the equipment was originally purchased.

Reporting the Tax Credit:

The 10% investment Tax Credit required filing Form 3468 Investment Credit. The entry went on Part I, line 3, "Reforestation Credit". The credit was added to any other regular investment credit you had for the year. You then completed Part II of Form 3468 to determine the amount of the credit you could have claimed after the limitations were considered. The credit allowed was carried over to Form 1040, line 44 if you filed as an investor, sole proprietorship, or farmer. Partnerships reported the credit on Form 1065 for distribution to the individual partners (in accordance with their distribution percentages). The same distribution process was followed for S Corporations using Form 1120S.

Reforestation Tax Credit Recapture

(NOTE: This recapture provision still applies to any timber for which the credit was claimed prior to October 22, 2004)

If the property is disposed of within 5 years from the time the reforestation investment tax credit was taken all or part of the investment credit is subject to recapture as ordinary income. The recapture amount is 100% if the property is disposed of before one year, and is reduced by 20% for each year thereafter up to five years. There is no recapture for dispositions after five years. Form 4255 is used to calculate the amount of recapture. Recapture of the investment credit does not apply to a transfer because of death, or a transfer between spouses. For qualified timber property subject to investment credit recapture, increase the basis of the timber by 50% of the recapture tax.