1. (RE)FORESTATION DEDUCTION AND AMORTIZATION
9/16/2018
W.L. Hoover

2. Tax Break for Forest Owners
Senate Bill 100, “Packwood Bill”; PL , 10/14/80
Added IRC Sections
48(A)(1)(F) - 10% investment credit repealed in 2004
194(a) - 84-month amortization
194(b) – expense deduction (P.L )
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W.L. Hoover

3. Exception to Basic Rule
IRC Sec. 611 requires
Capitalization of timber establishment costs to “deferred reforestation account”
Recovery by
Depletion allowance when severed
Allowable basis when disposed of on stump
Basis of timber subject to casualty or non-casualty business loss due to unusual and unexpected event
9/16/2018
W.L. Hoover

4. Treatments Expense currently Amortize over 84 month
Up to $10,000 of qualified expenses per year per qualified timber property (QTP)
Amortize over 84 month
Total amount over $10,000
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W.L. Hoover

5. Definition of QTP Must be for commercial timber production
planting, cultivation and management of timber as an investment or business, not personal use
Commercial means grown for eventual sale to to commercial processor, or use in your own trade or business
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W.L. Hoover

6. Not Qualifying
Buffer plantings except for component intended for commercial timber
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W.L. Hoover

7. Not Qualifying Christmas and ornamental tree plantings 9/16/2018
W.L. Hoover

8. Not Qualifying Wind break and other “conservation plantings” 9/16/2018
W.L. Hoover

9. QTP 1 acre minimum planting site Property located in U.S. 9/16/2018
W.L. Hoover

10. How Many QTP’s per Taxpayer?
Most aggressive position
Each planting project constitutes a QTP
Least aggressive position
One QTP per taxpayer
Moderate position
Each separately identified tract of land constitutes a QTP
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W.L. Hoover

11. Type of Taxpayer Trusts Don’t qualify for $10,000 expense
Do qualify for amortization of entire expenditure
Allocation required
Estates
Qualify for both expense and amortization
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W.L. Hoover

12. “Qualifying Expenditures”
Reforestation and afforestation
Artificial regeneration
Seedling
Direct seeding
Natural regeneration
Fencing to reduce browsing
Repellents
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W.L. Hoover

13. “Qualifying Expenditures”
All stand “establishment” costs
Site preparation
Seeds or seedlings
Paid labor (not value of owner’s labor
Depreciation on tools and equipment used in project
Herbicide and fertilizer
Any others “required to establish the stand”
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W.L. Hoover

14. Qualifying Expenditures
Includes all costs until stand is “established”
Stand established when -
Number of individual stems sufficient to adequately stock the site with desired species are capable of surviving without further effort to reduce competition from other vegetation.
IRS may question qualification of expenses beyond two years
9/16/2018
W.L. Hoover

15. How to Handle Cost-Share Payments
If you include the payments in your income
Total expenditure qualifies
Out-of-pocket portion, and
Cost-shared portion
If you qualified to excluded all or a portion from income
Excluded amount doesn’t qualify
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W.L. Hoover

16. Limits on Qualified Expenditures
Limit applies to,
Individual taxpayer, or married couple filing jointly
Business entity
Partnership,
Joint ownership
Corporation
Corporations filing consolidated return
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W.L. Hoover

17. Sec. 194 Amortization Deduction/Adjustment
For each year you have qual-ified expend-itures deter-mine,
Amortization schedule for each planting site
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W.L. Hoover

18. Sec. 194 Amortization Deduction
Total deduction for a given year is sum of current year’s and prior years’ schedule amounts
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W.L. Hoover

19. Sec. 194 Amortization Deduction
File with your return a Form 3P giving details of project and expenditures
File each year you make qualified expenditures
Not in a year you only claim a deduction/adjustment from prior year’s amortization schedule
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W.L. Hoover

20. Sec. 194 Amortization Deduction
Amortization rate
1/14th for 1st and 8th years
1/7th for years 2 through 7
Pennsylvania Black Cherry
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W.L. Hoover

21. Sec. 194 Amortization Deduction - Example
Assume qualified expenditure of $15,000
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22. Amortization Schedule
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23. Sec. 194 Amort. Deduction File 4562 Depreciation and Amortization form
Report in Part VI Amortization
Line 42 for current year’s deduction
Line 43 for amount from prior years’ amortization schedules
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W.L. Hoover

24. Sec. 194 Amortization Deduction
Transfer from Form 4562 to,
Business - “other expense” on Schedule C, F, 1120, 1065, etc.
Investment - adjustment to gross income on Form 1040 [§1.62-1(c) & §1.62-1T(12)]
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W.L. Hoover

25. Sec. 194 Amort. Deduction Recapture of tax benefit
If transferred within 10 years
Exemptions
transfers at death
Gift
Like-kind-exchanges
Involuntary exchanges
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W.L. Hoover

26. Complete Form T – Part IV
Complete for your records, don’t file with IRS
Include copy of 3P attach-ment in your records
Remember to capitalize amounts over $10,000
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W.L. Hoover

27. Thank You Forest Landowners Tax Council
Forest Landowners Tax Council P.O. Box 784 Alexandria, VA  (703)
             
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W.L. Hoover

28. Thank You Former Senator Packwood
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W.L. Hoover