“Are Christmas trees depreciable?” is a common question I receive from Christmas tree growers.
The short answer to this question is no, Christmas trees are not depreciable. However, the cost of Christmas trees is deductible in other ways, through either a cost of goods sold deduction or a depletion deduction.
What is Depreciation?
Depreciation is a tax deduction that recovers the cost of an asset with a lifetime greater than one year.
Property that has a useful life of (or is used up in) less than one year, such as supplies, fertilizer, and basic repairs, may be immediately deducted in the year the expense is incurred.
Assets that have a useful life greater than one year, such as buildings, tractors, and other equipment, must instead be depreciated, meaning their cost is not fully deductible in one year and must be deducted over multiple years.
For example, according to IRS Publication 946, the cost of machinery and equipment (such as a tractor) used in agriculture must be recovered over seven years. This means a Christmas tree grower who purchases a new tractor must deduct a portion of the cost of the tractor each year for seven years. However, a Christmas tree grower is often eligible to claim bonus depreciation or Section 179 expense, which often shortens this recovery period.
Christmas Trees Are Inventory
Although Christmas trees have a useful life longer than one year, they are not depreciable because they are “inventory” to a Christmas tree grower since they will eventually be held for sale to a customer. The Internal Revenue Code does not permit depreciation deductions for inventory. Instead, the cost of the inventory is deductible when it is sold.
How and When is the Cost of Christmas Trees Deductible?
Since Christmas trees are inventory to Christmas tree growers, the cost of the Christmas tree seedling, planting expenses (land preparation, root dip, etc), and planting labor may not be deducted in the year the seedlings are planted.
Instead, a Christmas tree grower should “capitalize” seedling and planting costs. Costs are capitalized by combining the costs in a separate recordkeeping account and deducting the costs as a “Cost of Goods Sold” deduction in the year the trees are sold.
If a grower elects capital gain treatment on the sale of cut Christmas trees (which will save most Christmas tree growers thousands of dollars), the seedling and planting costs are deductible as a “depletion” deduction.
Depletion is very similar to a Cost of Goods Sold deduction, but is only used when referring to natural resources, such as timber, oil, or mining. Since Christmas trees are considered timber under Internal Revenue Code § 631 if certain requirements are met, depletion is used.
A Christmas tree grower should also take a yearly Christmas tree count in order to properly calculate a depletion deduction.
A yearly count also helps a grower determine the number of trees that were culled or otherwise lost due to disease, pests, drought, or other reasons. These trees may be deducted as part of a grower’s depletion or cost of goods sold in the year the trees were culled or lost.
Another important rule to remember is that a depletion or cost of goods sold deduction for Christmas trees is the cost of the tree, not its market value. Most growers show a small deduction for depletion relative to Christmas tree sales because the cost of a seedling and planting is generally only a few dollars for each tree.
Conclusion
Correct recordkeeping of the cost of seedlings and other planting costs is extremely important, especially if a grower is electing capital gain treatment.
Christmas trees are not depreciable. However, the cost of seedlings and other planting costs are deductible through either a cost of goods sold or a depletion deduction.
Have questions or need help properly calculating your Christmas tree inventory? Contact Andrew for an Christmas tree inventory review!
