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(RE)FORESTATION DEDUCTION AND AMORTIZATION. Senate Bill 100, “Packwood Bill”; PL 96-451, 10/14/80 Added IRC Sections 48(A)(1)(F) - 10% investment credit repealed in 2004 194(a) - 84-month amortization 194(b) – expense deduction (P.L. 108-357). Tax Break for Forest Owners.

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Tax break for forest owners

Senate Bill 100, “Packwood Bill”; PL 96-451, 10/14/80

Added IRC Sections

48(A)(1)(F) - 10% investment credit repealed in 2004

194(a) - 84-month amortization

194(b) – expense deduction (P.L. 108-357)

Tax Break for Forest Owners

W.L. Hoover

Exception to basic rule

IRC Sec. 611 requires

Capitalization of timber establishment costs to “deferred reforestation account”

Recovery by

Depletion allowance when severed

Allowable basis when disposed of on stump

Basis of timber subject to casualty or non-casualty business loss due to unusual and unexpected event

Exception to Basic Rule

W.L. Hoover


  • Expense currently

    • Up to $10,000 of qualified expenses per year per qualified timber property (QTP)

  • Amortize over 84 month

    • Total amount over $10,000

W.L. Hoover

Definition of qtp
Definition of QTP

  • Must be for commercial timber production

    • planting, cultivation and management of timber as an investment or business, not personal use

    • Commercial means grown for eventual sale to to commercial processor, or use in your own trade or business

W.L. Hoover

Not qualifying
Not Qualifying

  • Buffer plantings except for component intended for commercial timber

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Not qualifying1
Not Qualifying

  • Christmas and ornamental tree plantings

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Not qualifying2
Not Qualifying

  • Wind break and other “conservation plantings”

W.L. Hoover


  • 1 acre minimum planting site

  • Property located in U.S.

W.L. Hoover

How many qtp s per taxpayer
How Many QTP’s per Taxpayer?

  • Most aggressive position

    • Each planting project constitutes a QTP

  • Least aggressive position

    • One QTP per taxpayer

  • Moderate position

    • Each separately identified tract of land constitutes a QTP

W.L. Hoover

Type of taxpayer
Type of Taxpayer

  • Trusts

    • Don’t qualify for $10,000 expense

    • Do qualify for amortization of entire expenditure

    • Allocation required

  • Estates

    • Qualify for both expense and amortization

    • Allocation required

W.L. Hoover

Qualifying expenditures

Reforestation and afforestation

Artificial regeneration


Direct seeding

Natural regeneration

Fencing to reduce browsing


“Qualifying Expenditures”

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Qualifying expenditures1
“Qualifying Expenditures”

  • All stand “establishment” costs

    • Site preparation

    • Seeds or seedlings

    • Paid labor (not value of owner’s labor

    • Depreciation on tools and equipment used in project

    • Herbicide and fertilizer

    • Any others “required to establish the stand”

W.L. Hoover

Qualifying expenditures2
Qualifying Expenditures

  • Includes all costs until stand is “established”

  • Stand established when -

    • Number of individual stems sufficient to adequately stock the site with desired species are capable of surviving without further effort to reduce competition from other vegetation.

  • IRS may question qualification of expenses beyond two years

W.L. Hoover

How to handle cost share payments
How to Handle Cost-Share Payments

  • If you include the payments in your income

    • Total expenditure qualifies

      • Out-of-pocket portion, and

      • Cost-shared portion

  • If you qualified to excluded all or a portion from income

    • Excluded amount doesn’t qualify

W.L. Hoover

Limits on qualified expenditures
Limits on Qualified Expenditures

  • Limit applies to,

    • Individual taxpayer, or married couple filing jointly

    • Business entity

      • Partnership,

      • Joint ownership

      • Corporation

      • Corporations filing consolidated return

W.L. Hoover

Sec 194 amortization deduction adjustment

For each year you have qual-ified expend-itures deter-mine,

Amortization schedule for each planting site

Sec. 194 Amortization Deduction/Adjustment

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Sec 194 amortization deduction
Sec. 194 Amortization Deduction

  • Total deduction for a given year is sum of current year’s and prior years’ schedule amounts

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Sec 194 amortization deduction1
Sec. 194 Amortization Deduction

  • File with your return a Form 3P giving details of project and expenditures

    • File each year you make qualified expenditures

    • Not in a year you only claim a deduction/adjustment from prior year’s amortization schedule

W.L. Hoover

Sec 194 amortization deduction2
Sec. 194 Amortization Deduction

  • Amortization rate

    • 1/14th for 1st and 8th years

    • 1/7th for years 2 through 7

Pennsylvania Black Cherry

W.L. Hoover

Sec 194 amortization deduction example
Sec. 194 Amortization Deduction - Example

  • Assume qualified expenditure of $15,000

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Sec 194 amort deduction
Sec. 194 Amort. Deduction

  • File 4562 Depreciation and Amortization form

    • Report in Part VI Amortization

      • Line 42 for current year’s deduction

      • Line 43 for amount from prior years’ amortization schedules

W.L. Hoover

Sec 194 amortization deduction3
Sec. 194 Amortization Deduction

  • Transfer from Form 4562 to,

    • Business - “other expense” on Schedule C, F, 1120, 1065, etc.

    • Investment - adjustment to gross income on Form 1040 [§1.62-1(c) & §1.62-1T(12)]

W.L. Hoover

Sec 194 amort deduction1
Sec. 194 Amort. Deduction

  • Recapture of tax benefit

    • If transferred within 10 years

    • Exemptions

      • transfers at death

      • Gift

      • Like-kind-exchanges

      • Involuntary exchanges

W.L. Hoover

Complete form t part iv
Complete Form T – Part IV

  • Complete for your records, don’t file with IRS

  • Include copy of 3P attach-ment in your records

  • Remember to capitalize amounts over $10,000

W.L. Hoover

Thank you forest landowners tax council
Thank You Forest Landowners Tax Council

Forest Landowners Tax CouncilP.O. Box 784Alexandria, VA  22313-0784(703) 549-0747

[email protected]

W.L. Hoover