Fall 2005

Landowner's Toolbox

Tax Benefits for Forest Landowners

by John Greene

The American Jobs Creation Act of 2004 includes four provisions specifically for forest landowners. Two are broad in focus and affect many owners.

Tax Treatment of Reforestation Costs

Previously, owners could take a 10 percent reforestation tax credit on and amortize (write off over 8 tax years) up to $10,000 per year of their out-of-pocket costs to establish timber. The 2004 law allows owners to deduct outright up to $10,000 per year of these costs and amortize any additional amount, again over 8 tax years. The reforestation tax credit was repealed. Although the reforestation tax incentives changed, the rules about which costs qualify remain the same.

Deduction of Management Expenses

The American Jobs Creation Act of 2004 removed filing-status restrictions on owners who qualify as active participants in their timber-growing enterprise and who sell timber. The law allows these owners to deduct their management expenses most fully. To ensure that timber income is taxed as a capital gain rather than ordinary income, owners must dispose of timber under the provisions of IRS code section 631. Under the 2004 law, an outright sale of stumpage—as with a lumpsum sale—also qualifies as a section 631 disposal. For tax purposes, the “date of disposal” for a disposal with an economic interest retained remains the date the volume of cut timber is first definitely determined; for an outright sale, the “date of disposal” is when ownership of the timber changes hands.

Two other provisions which affect forest landowners have a more narrow focus. One allows owners to revoke an election under section 631(a) of the IRS code one time without IRS consent. The second changes the tax treatment of the sale of certain real assets by real estate investment trusts (REITs) that own land.

---

For more information:
John Greene at 504-589-7130 or jgreene01@fs.fed.us

John Greene interpreted the forest landowner benefits of the American Jobs Creation Act of 2004. He is a research forester with the Evaluation of Legal, Tax, and Economic Influences on Forest Resource Management unit in New Orleans. Claire Payne contributed to this article.

The USDA Forest Service has published two documents related to the filing of Federal income taxes and timber sales for the year 2005. The first, co-authored by John Greene and Larry Bishop, taxation specialist with Region 8, addresses frequently asked questions, and the second provides tips for forest landowners. Both documents were updated December 1, 2005.

FAQs: http://www.fs.fed.us/cooperativeforestry/library/timbertax.pdf

Tax Tips: http://sref.info/news_items/newsitem_12.15.2005