There are 3 main types of reforestation expenditures that qualify for accelerated deduction under Internal Revenue Code (IRC) § 194.
Forest landowners and their advisors frequently ask me questions about qualifying reforestation expenditures.
One of the most common questions is “What expenses are considered qualifying reforestation expenditures?”
This article will give a brief refresher on deducting reforestation costs, describe the three main types of reforestation expenditures that qualify under IRC § 194, and discuss the types of expenses that do not qualify as reforestation expenditures.
Deducting Qualifying Reforestation Expenditures
The general rule is that a forest landowner must capitalize reforestation costs and deduct the costs when they sell or harvest the timber.
This means a forest landowner typically must wait decades to recover their reforestation costs.
Fortunately, IRC § 194 provides two ways for forest landowners to recoup and deduct their reforestation costs quicker:
1) A forest landowner may immediately expense qualifying reforestation expenditures up to a maximum of $10,000.
2) A forest landowner may also choose to amortize and deduct qualifying reforestation expenditures over 84 months (8 tax years). Amortization is similar to depreciation and means the total reforestation cost is deducted equally over 84 months. The $10,000 limitation does not apply to amortization.
Find out more in my detailed article “Reforestation Expenditures & Timber Basis – Back to Basis (Part 3).”
The 3 Main Types of Qualifying Reforestation Expenditures
The three main types of qualifying reforestation expenditures are expenditures for:
1) Site preparation
2) Seed or seedlings; and
3) Labor and tool expense.
According to Revenue Ruling 75-467, qualifying expenditures are direct costs incurred in artificial or natural seeding and include:
1) preparation of the site, including any girdling, herbicide application, baiting of rodents or brush removal work to afford good growing conditions;
2) costs of seed or seedlings; and
3) labor and tool expense, including depreciation of equipment such as tractors, trucks, tree planters, and similar machines used in planting or seeding.
Silviculture Expenses Do Not Qualify
It is important to contrast reforestation expenditures with silvicultural expenses, which do not qualify for deduction under § 194.
Silvicultural expenses are the ongoing expenses of maintaining a stand of timber, while reforestation costs are incurred in establishing the stand of timber.
Common silvicultural expenses include brush clearing (after a stand had been established), thinning, insect control, disease control, fire mitigation, prescribed burns, and fertilizer.
Indirect Expenses Also Do Not Qualify
Indirect expenses do not qualify for deduction under § 194 because only direct expenses qualify.
According to Revenue Ruling 75-497, an example of an indirect expense is “interest paid on money borrowed to satisfy a state law requiring a deposit to guarantee natural reforestation over a specified period of years in lieu of planting.”
Other examples of indirect expenses are a management plan and consulting forester fees (assuming the forester’s labor is not a direct reforestation expense).
Conclusion
Deducting qualifying reforestation expenditures is a great way for forest landowners to save taxes.
Forest landowners should make sure their reforestation expenditures are direct expenses for reforestation that fall within the three main types of qualifying expenditures: 1) Site preparation; 2) seed or seedlings; and 3) labor and tool expense.
Have additional questions about deducting qualifying reforestation expenditures? Contact me today!
