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Gulf Zone Legislation Helps All Tree Farmers

Tree Farmer Magazine: March/April 2006 - Volume 25 No. 2

The Katrina Emergency Tax Relief Act of 2005 (KETRA), P.L. 109-73, signed by President Bush on September 23, 2005 and the Gulf Opportunity Zone Act of 2005 (GOZA), P.L. 109-35, signed by the President on December 21, 2005 provide tax help for Tree Farmers in the Gulf region. In addition, technical corrections apply to all Tree Farmers. Numerous non-timber related changes were made that will affect the tax returns of Tree Farmers in the Gulf region. Professional tax assistance is especially important.

Reforestation Provisions

Taxpayers, other than trusts, can deduct up to $10,000 per year of qualified reforestation expenses. Qualified expenditures above this amount can be amortized over an 84-month period. This deduction has been increased for Tree Farmers in the three Gulf Opportunity Zones. Technical corrections clarify the treatment of estates and trusts.

Estates and Trusts - Since the passage of the American Jobs Creation Act of 2004 (AJCA), P.L. 108357, there had been confusion over how estates and trusts are treated under Sec. 194, allowing taxpayers to elect to deduct annually up to $10,000 of qualified reforestation expenses, and amortize an unlimited amount of qualified expenditures over $10,000. In fact, the 2005 instructions for Schedule F, Form 1040, specifically state that estates do not qualify for the deduction.

Technical corrections included in GOZA have cleared up the confusion. Estates qualify for the deduction up to $10,000of qualified reforestation expenses, and the amortization of amounts over $10,000. As before, trusts do not qualify to expense up to $10,000 of reforestation expenses, however, they do qualify to elect to amortize their total reforestation expenditures. As before, the deduction and amortization are a deduction for businesses and an adjustment to gross income for investors. Thus, investors benefit even if they don't itemize deductions.

What Qualifies - The wording in Sec. 194 as amended by AJCA can be interpreted to mean that a taxpayer other than a trust, qualifies for the annual $10,000 reforestation deduction for each "qualified timber property" owned or leased. The limit is $5,000 for married taxpayers filing separately. Please remember that $10,000 is a maximum. If your qualified expenditures total less than this, the deduction is the amount actually spent. A logical definition of "qualified timber property" is the timberland included in one block, as defined by the taxpayer for depletion accounting purposes.

The IRS is expected to issue a ruling on this question in the near future. If you and your tax preparer are of the conservative persuasion, you'll want to file your 2005 return assuming that you qualify for only one $10,000 deduction. If the ruling allows multiple qualified timber properties, you can file an amended return, assuming your timberland is not all in one block, or otherwise qualifies based on the ruling defining qualified timber property. Likewise, you could take the aggressive approach, assuming you'll qualify for multiple qualified timber properties, and file an amended return if the ruling is otherwise. Isn't this fun?

Increased Deduction for Gulf Opportunity Zone - Timber owners in three designated hurricane damaged zones, refereed to as Gulf Opportunity Zone (GOZ), can deduct up to $20,000, $10,000 if married filing separately, per year of qualified reforestation expenditures for each qualified timber property.

This is an increase from the usual limit of $10,000, or $5,000 if married filing separately, as discussed above. This additional deduction does not apply to publicly traded corporations, real estate investment trusts and taxpayers who own or lease more than 500 acres of qualified timber property in total, including timberland inside and outside GOZ's. The three zones have different effective time periods:

Gulf Opportunity Zone - Reforestation expenditures for qualified timber properties within this zone qualify for the additional deduction if made on or after August 28, 2005, and before January 1, 2008.

Rita Gulf Opportunity Zone but outside the Gulf Opportunity Zone - Expenditures on or after September 23, 2005, and before January 1, 2008

Wilma Gulf Opportunity Zone but outside the Gulf Opportunity Zone and outside the Rita Gulf Opportunity Zone - After October 23, 2005, and before January 1, 2008.

All the provisions of Code Sec. 194 apply to the additional $10,000 deduction. Again, both the $10,000 and $20,000 are maximums, limited by the actual amount of qualified expenditures if less than these limits. In all cases, amounts over the maximum can be amortized over 84 months. Counties included in disaster areas are given on FEMA's website, www.fema.gov/news/disasters.fema?year=2005.

The January 1, 2008, cutoff date is law as of now, but meeting this cutoff date if very unlikely given the millions of acres that should be planted. Please let the appropriate forestry officials in your state know of your situation, so that this cutoff date can be reconsidered by Congress next year.