Reforestation Current Deduction and Amortization:
This discussion applies to reforestation activities, such as planting trees on cut-over timberland, and afforestation activities, such as planting trees on land formerly used for crops, or constructing fences to keep deer from eating stump sprouts and seedlings regenerating naturally. Your out-of-pocket expenses to establish a stand of timber are a capital cost that previously had to be capitalized to a deferred reforestation (plantation) account. Over the years exceptions have been provided, including a 10 percent tax credit and amortization. Currently there are two exceptions:
Costs incurred by farmers who plant trees primarily for conservation purposes may qualify as a soil and water conservation expense under Sec. 175 of the Internal Revenue Code (Code)). The growing of timber, however, is not farming for purposes of Code Sec. 175.
Up to $10,000 of qualified expenses for the establishment of commercial timber stands may qualify as a current deduction, and amounts over $10,000 may qualify for amortization over an 84-month period. The expensing limit applies to each Qualified Timber Property (QTP). These provisions come under Code Sec. 194.
NOTE: Internal Revenue Bulletin 2006-20 (Elections Created or Affected by the American Jobs Creation Act of 2004) Section 322 of the Act provides further guidance for reforestation expenditures with respect to a qualified timber property paid or incurred after October 22, 2004.
To take the current deduction or amortization you must determine if your timberland falls under the definition of "Qualified Timber Property" (QTP) as defined in Code Sec. 194:
The term "qualified timber property" means a woodlot or other site located in the United States which will contain trees in significant commercial quantities and which is held by the taxpayer for the planting, cultivating, caring for, and cutting of trees for sale or use in the commercial production of timber products. (Code Sec. 194(c)(1)
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. The site being reforested must be at least one acre in size. And as a result of the reforestation expenditures, the site must contain enough trees to be adequately stocked for the purposes of commercial timber production. Both owned and leased land qualifies.
Timber grown for your own personal use, such as firewood for your home, does not qualify. Trees planted for the production of Christmas trees, whether for personal use or commercially, do not qualify.
To learn more about the reforestation deduction and amortization provisions for expenditures after October 22, 2004, click on one of the topics below. If your timberland is located in one of the so-called Gulf Opportunity Zones following this link after learning about the basic treatment of reforestation expenses. If you're seeking information on the treatment of reforestation expenditures on or before October 22, 2004 following this link.