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Guidelines

Qualified Costs:

Qualified reforestation expenses are those paid to establish commercial stands of timber. Qualified expenses include those for site preparation, seeds, or seedlings, paid labor, tools, herbicide, depreciation on equipment used in the planting or seeding, and any other costs required to reestablish timber stands after a harvest, or to establish stands on land that was previously not forested. These expenditures are reported in the year the expenditures are incurred, regardless of when the activity is carried out. For cash basis taxpayers an expenditure is incurred in the year it is actually paid.

A maximum of $10,000 per year per Qualified Timber Property (QTP) of qualified reforestation expenses (or afforestation in the case of planting or seeding of non-forest land) which usually must be capitalized to a deferred reforestation account, may qualify for deduction as a business or investment expense. The amount of expenditure over $10,000 per QTP may be amortized over an 84-month period. There is no limit on the amount that can be amortized.

Qualified Timber Property:

The $10,000 annual limit on expensing and the record keeping requirements are based on identification of each of your "qualified timber properties" (QTP). The QTP term originated in the process of amending Code Sec. 194 in 2004 (American Jobs Creation Act of 2004, Act Sec. 322). How the term should be applied to the many ways in which timber production is carried on the ground and in depletion accounts is open to interpretation and is a likely subject for future revenue rulings or development under case law. The following examples are based on a conservative interpretation of how to determine what constitutes a QTP. Reporting requirements when an election is made to expense currently and/or amortize reforestation expenses are covered elsewhere.

Example 1. One-Tract-One-Stand. Mr. and Mrs. Jones own 60 acres of southern pine timberland managed as a single even-aged stand. The Jones qualified timber property (QTP) is the entire 60 acres. The stand reached rotation age and was harvested in December of 2004. The 60 acres was site prepared and planted in 2005 by a consulting forestry firm at a cost of $200 per acre. Assuming the Jones' otherwise met all the qualifications for the current deduction and amortization of reforestation expenses under Code Sec. 194, they treat their timber activities as an investment, and file a joint return, they elect Sec. 194 treatment and claim an adjustment to gross income of $10,143 on their Form 1040. The $10,143 includes their $10,000 current expense allow ance, and the first year's amortization of $143 ($2,000 divided by 14).

Example 2. One-Tract-Two Stands. Mr. and Mrs. Smith own 110 acres of Douglas fir timberland in Oregon. The timber was small sawtimber when they purchased the property in 1985. They allocated the original basis in the timber to one depletion account. Thus, all their timber is included in one "block" for purposes of depletion, casualty loss determinations, and other transactions for which the basis of the timber is a factor. The timber is managed on an even-aged basis as two separate stands of 60 and 50 acres. This decision was based on differences in aspect and soils that result in different growth rates and timber qualities for the two stands. The 60 acre stand will reach rotation age and be harvested in about 2012. The 50 acre stand was harvested in 2004 and reforested by a contractor in 2005 at a cost of $300 per acre, making the total expenditure $15,000. The Smith's have one QTP for purposes of electing to expense currently and amortize qualified reforestation expenditures. Because of other income producing activities conducted on the timberland the Smith's treat their activities as a business. They also file jointly. On their 2005 Form 1040, Schedule C, they elect to report a $10,000 "other expense," and an amortization deduction of $357 ($5,000/14). As required by the IRS they carry the new stand of timber on their books as a separate account even though the dollar basis is zero. It is carried until the stand is disposed of.

Example 3. Two-Tracts-Multiple-Stands. Mrs. Brown, an unmarried widow, owns 650 acres of northern hardwood, and pine-aspen timberland. Her ownership consists of 450 acres of hard maple and yellow birch timber purchased in 1980. This tract is designated in her records as the NHW-Tract. The 200 acres of pine-aspen land was purchased in 1990 and is designed in her records as the PA-Tract. The northern hardwood property is managed using a technique known as crop-tree selection, a type of uneven-aged management. The pine-aspen property is managed as five separate stands with pine stands on the sandy high ground, and aspen on the low land. At the time each tract was purchased one depletion account was established for each tract. These accounts have been maintained separately since the time of purchase. Mrs. Brown has two QTP's for purposes of electing to deduct currently and amortize reforestation expenses under Code Sec. 194.
In 2004 Mrs. Brown's forester recommended harvesting all the timber on the 120 acres of the northern hardwood tract that was poorly stocked and not responding to thinnings. He also informed her that it would be necessary to fence the harvested area to get an acceptable level of regeneration because of high white tail deer densities. The forester's recommendations were carried out in 2005 at a total cost of $25,000. A 45 acre pine stand on the PA-Tract was harvested in the winter of 2005 and reforested that spring at a total cost of $8,500. Mrs. Brown reports her timber activities as a business using Form 1040-Schedule C. On her 2005 Schedule C under "other deductions" she made these three entries:

• NHW-Tract, Sec. 194(b) expense . . . . . $10,000
• NWH-Tract, Sec. 194(a) amortization . . $ 1,071
• PA-Tract, Sec. 194(b) expense . . . . . . $ 8,500