Where do we deduct up to $10K reforestation expenses?

[mikeburg]

For a 1040 tax client that does not use a schedule C (treats timber sales as a sch D capital sale), where do you report up to $10,000 reforestation expenses? (He got 1/2 of the expenses refunded by forest service & a 1099 requiring us to report that as income).

When was the reforestation tax credit done away with?

I don't know why I am having trouble finding this.

I really appreciation any & all information. mikeburg

[FEDUKE404]

Deduct here

Include running, 7-year amortized expenses on line 36 of Form 1040, with code "RFST" added per IRS instructions. Your tax software should show you the way. . .

The deduction actually crosses eight calendar years - six full and two halves - for the costs incurred each year. Read more here, look for "reforestation costs":

http://www.irs.gov/publications/p535/ch08.html#en_US_2013_publink1000209009

I have not set up any such expenses in recent years, although I do have a client who just finished "using" the allowable historical expenses. (He's now ready to start harvesting some of those original "baby trees.") IIRC, the rules may have been tweaked by the IRS but something resembling the reforestation adjustment to income should still be out there.

FE

[Koss]

Observations

FEDUKE cites Pub. 535, which does indeed contain information about how to amortize reforestation costs.

However, Pub. 535 also says that you can deduct up to $10,000 of reforestation costs. The amortization is meant for the remaining costs, i.e., the amount that exceeds $10,000.

But I think that this mechanism--the deduction of the first $10K and the amortization of the remaining amount--may only be available for the sale of qualified timber property, which is defined as follows:

- - - - -
Qualified timber property. Qualified timber property is property that contains trees in significant commercial quantities. It can be a woodlot or other site that you own or lease. The property qualifies only if it meets all of the following requirements.

It is located in the United States.

It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products.

It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation.

Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees.
- - - - -

The original post says that the taxpayer is treating the timber as a capital asset, and reporting the sale on Schedule D. That doesn't sound like timber that he will "use in, or sell for use in, the commercial production of timber products." At least that is one way of reading this. The guy is not in the timber business; he's an investor. We're talking about the difference between Schedule D and Form 4797, i.e., the difference between a capital asset and an asset used in a trade or business.

It is possible that neither the deduction nor the amortization are available in this case.

Reforestation costs are generally capital expenditures.

If the deduction and amortization of reforestation costs are not applicable because it is not qualified timber property, then the reforestation costs would have to be added to the basis.

But added to the basis of what? The timber that was sold in 2013? Probably not. It would have to be added to the basis of the timber that is sold from that lot in the future, i.e., the timber that grows from the reforestation.

[FEDUKE404]

Clarification needed

My only comments were re how to treat qualifying reforestation costs that could be immediately used on an annual basis.

There was (is?) certainly a $10k wall for annual costs, but for all years except one my client met those requirements. (The "bad" year costs are still rattling around.) The annual process was fairly simple for him: Figure annual costs (<$10k), take 1/14th the first year, 1/7th for a while, and 1/14th the final year. The costs for each year were handled much like a depreciable asset, i.e. a "schedule" for tracking the costs for each year the expenses were made. Of course, the positive was the allowable amount was treated as an adjustment to income so long as there were some pieces left over within each group of costs.

I think the rules for such have been changed in recent years, so I have not had any "new" expenses especially now that the deducted reforestation expenses from some years ago have now resulted in a large stand of nearly mature pines. For anyone facing 2013 expenditures, you need to do your homework!

But I am enjoying the conversation here !

FE

[mikeburg]

Thank you for everything. I am still reading & considering. mikeburg