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Restrictions

The land being reforested must be held for the commercial production of timber as a business or an investment. Commercial production means that the timber is being grown for the eventual sale to commercial timber processors or for use in your own trade or business. Timber grown for your own personal use, such as firewood for your home, does not qualify.

The site being reforested must be at least one acre in size, and located in the United States. As a result of the reforestation expenditures, the site must contain enough trees to be adequately stocked for the purposes o f commercial timber production. Adequacy should be based on recommendations of professional foresters, or stand industry practices in the region. Both owned and leased land qualifies.

How $10,000 limit is applied. Individuals - The maximum reforestation expenditure that you can elect to expense currently is $10,000 per year for each qualified timber property (QTP). If you are married and file separately the limit is $5,000 per year for each spouse for each QTP. Business - This limit also applies to each business entity such as a partnership, limited liability company, or corporation, for each QTP.

Amortize amounts over $10,000 per QTP per year. You may elect to amortize expenditures in excess of $10,000 per year for each QTP. There is no limit on the amount of qualified expenditures that can be amortized. Expenditures not expensed or amortization are recorded in a deferred reforestation (plantation) account and transferred to a merchantable timber account when the timber becomes merchantable.

Life tenant and remainderman. If the land upon which the timber stand is established is subject to a life estate, only the life tenant qualifies to make the election to deduct and/or amortize qualified expenditures. The remainderman does not qualify. (Code Sec. 194(d)).

Estates. If the land upon which the timber stand is established is controlled by an open estate, the administrator of the estate may elect to deduct and/or amortize qualified expenditures in the same manner as other taxpayers. However, special rules apply generally to the determination of the income tax liability of estates, including how losses are treated, and the differentiation between transaction reported by the estate and those reported as" income in respect of a decedent."

Estates. If the land upon which the timber stand is established is controlled by an open estate, the administrator of the estate may elect to deduct and/or amortize qualified expenditures in the same manner as other taxpayers. However, special rules apply generally to the determination of the income tax liability of estates, including how losses are treated, and the differentiation between transaction reported by the estate and those reported as" income in respect of a decedent."

NOTE: Guidance on the allocation of deductible and amortizable amounts between the fiduciary and beneficiaries is to be provided by yet to be promulgated regulations under Code Sec. 194(c)(4). Obviously regulations will make clear that under no circumstance may the same dollar of deductible or amortizable amount be claimed on more than one tax return, nor as an administrative expense of the estate.

Trusts. If the land upon which the timber stand is established is titled to a trust the fiduciary may NOT elect to deduct qualified expenditures of up to $10,000 per QTP per year (Code Sec. 194(b)(1)(B)(iii)). No exception for grantor trust is made in the Code nor legislative history. Generally such trusts are ignored for income tax purposes and all transactions of the trust are included in the tax return of the grantor. Trusts do qualify to elect to amortize qualified expenditures, as discussed here.

NOTE: Guidance on the allocation of deductible and amortizable amounts between the fiduciary and beneficiaries is to be provided by yet to be promulgated regulations under Code Sec. 194(c)(4). Obviously regulations will make clear that under no circumstance may the same dollar of amortizable amount be claimed on more than one tax return.

Any part of your reforestation (or afforestation) expenditures for which you were reimbursed or expect to be reimbursed in a later tax year under any cost-sharing program does not qualify. If you elect to include the cost-share payment with your ordinary income, your total expenditures, including the portion reimbursed will qualify, (see handling cost-share payments).

Trees planted for ornamental purposes, including Christmas trees, and those planted as shelter-belts, or wind breaks do not qualify. Trees held primarily for the production of nuts do not qualify unless the taxpayer can prove that the trees are being held primarily for commercial timber production and not nut production.

If the reforested area is disposed of within 10 years of the year the expensed or amortized costs were deducted, part or all of your gain on the disposition must be recaptured as ordinary income. (Code Sec. 1245(a)(2)(C))

The elections to deduct currently and amortize reforestation expenses must be made on the return for the year in which the expenses were incurred, plus extensions. The elections cannot be made on an amended return.

NOTE: Generally capital expenditures are reported for tax purposes in the year in which the asset or improvement is "installed." In the case of reforestation expenditures, however, expenditures are reported in the year the expenditures are incurred, regardless of when the activity is actually carried out. The year in which an expenditure is incurred depends on your accounting system. For cash basis taxpayers an expenditure is incurred in the year in which it is actually paid.