On the Jobs Creation Act
Tree Farmer Magazine: July/August 2005 - Volume 24 No. 4
By Bill Hoover
In this column I'll provide additional updates on the American Jobs Creation Act (AJCA) of 2004 as discussed in the previous column. I've included some legal citations to allow your tax preparer to know the basis for my conclusions.
Reforestation expenses - recall that AJCA amended the reforestation amortization section of the laws (IRC Sec. 194) to allow you to elect to deduct up to $10,000 per year of qualified reforestation expenses. Any amount more than $10,000 can be amortized over 84-months. The reforestation tax credit was eliminated. This treatment applies to qualified expenditures after October 22, 2004. There is a question about how the limits will be allocated between the two treatments in 204. If you had $10,000 of qualified expenditures as of October 22, 2004, you could claim the 10-percent tax credit and amortization deduction on this amount. If you had additional expenditures after October 22, 2004, my interpretation is that you will not be allowed to claim an additional $10,000 for the new expense deduction, but it is possible that you will be allowed to amortize such amounts. TurboTax software interprets the law this way.
If you file as a business, these deductions are taken as a business expense on your business tax form. but, with the exception of property taxes, Tree Farmers filing as investors report expenses as miscellaneous itemized deductions on their Form 1040, Schedule A. Miscellaneous itemized deductions increase total itemized deductions only to the extent miscellaneous itemized deductions exceed 2 percent of adjusted gross income. Reporting the reforestation expense and/or amortization deduction as an adjustment to gross income means that you can benefit as long as you have sufficient gross income to offset the reforestation expense.
It is definite that Tree Farmers filing as investors can report their reforestation expense deduction or amortization deduction for the year as adjustments to gross income. This is because both treatments come under code Sec. 194, and Code Sec. 62(a)(11) specifies that deductions under Sec. 194 are adjustments to gross income. Also, note that amounts from amortization schedules for prior years can continue to be deducted as usual.
Several issues are not yet resolved. The procedure for making the election to expense up to $10,000, and to amortize amounts over $10,000 need to be issued by the IRS. They will need to address such issues as whether a taxpayer can elect to amortize the first $10,000 of qualified expenditures, instead of expensing it. There is also concern about the correct interpretation of the phrase "any qualified timber property." Some have suggested that this implies that each "qualified property" owned by a taxpayer qualifies for up to a $10,000 expense deduction. Previously it was clear that the limit applied to the taxpayer, regardless of how many properties the taxpayer owned.
Capital gains treatment - Recall the AJCA eliminated the Catch 22 for Tree Farmers who lie as a business but want to sell timber on the stump using lump-sum contracts, so-called outright sales,instead of having to risk using a pay-as-cut contract to qualify for capital gains treatment. Please note that the basic structure of the tax law wasn't changed. Timber held for use in the trade or business of growing timber or primarily for sale to customers remains Sec. 1231 property and is reported on Form 4797 with other transactions involving the disposal of business assets. What AJCA did was allow lump sum sales to qualify under Code Sec. 631(b), disposal with an economic interest retained. This means that your timber gains and losses are netted against other gains and losses from the disposal of business assets, on Form 4797, before net amounts are transferred to Schedule D, and netted against other gains and losses on your Schedule D.