Tax Planning -- The Reforestation Incentive

Northern forest in fall foliage next to a stream courtesy of David Whiteman

Soon we will all be filing our 2015 tax returns.  The current income tax law has a special provision for forest landowners.  The law allows landowners to deduct from their income tax return up to $10,000 in reforestation expenditures per tax year, per qualified timber property. 

Reforestation expenditures can include site preparation, seedlings, planting costs and necessary expenses to ensure that the trees are free to grow.  This incentive isn’t just for those planting trees.  If you incur expenses to encourage natural regeneration, those expenses are also eligible for the reforestation incentive.  For those who are dealing mainly with hardwoods, this isn’t just a pine incentive.  Bottom line, this incentive is for anyone reforesting or afforesting (land previously in a non-forest use) their property.   If forest practice rules in your state require reforestation after a harvest, this provision is still available.                                            

Each year that you incur reforestation related expenses, you may deduct up to $10,000 of reforestation expenditures.  Make sure you see the each year part.  So if you incur site preparation expenses in one calendar year and then do the planting in the next calendar year, you have $10,000 for the expenses in the first year (when you did site preparation) and another $10,000 for the expenses in the year you planted! 

What if you spend more than $10,000 in a year on site preparation expenses?  The IRS allows you to deduct the amount over $10,000 in a tax year through a process called amortization.  That is the fancy way of saying that you may deduct the rest over the next seven tax years.  At the end of year seven, all of your reforestation expenses for that tax year would have been deducted on your tax return. 

Some of you have heard me preach about basis and that you need it to reduce the amount of income taxable after a sale.  So what does the reforestation incentive do to your basis?  If you use the reforestation incentive and deduct your expenses through either the $10,000 deduction or the amortization you will not have any basis in the trees (unless you incur some other capital expense before the harvest).  Don’t let that worry you.  It is better for you to receive the tax benefit today on those expenses instead of carrying those expenses (in a basis account) until the time of harvest.  Think of it this way, if you deduct those expenses now, you are able to take the tax savings and invest it elsewhere.  If you don’t deduct and carry it as basis that money is tied up and is no benefit until you harvest many years from now. 

If you have reforested your property in 2015 or are preparing to site prep and plant a tract this year, consult with your accountant about taking the reforestation incentive.