Reforestation Costs

You can choose to amortize a limited amount of reforestation costs for qualified timber property over a period of 84 months. Reforestation costs are the direct costs of planting or seeding for forestation or reforestation.

The choice to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. A partner, shareholder, or beneficiary cannot make that choice.

A trust cannot choose to amortize reforestation costs and cannot deduct its share of any amortizable reforestation costs of a partnership, S corporation, or estate.

Qualifying costs. Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. They include costs for the following items.

• Site preparation.
• Seeds or seedlings.
• Labor.
• Tools.
• Depreciation on equipment used in planting and seeding.

Costs you can deduct currently are not qualifying costs.

If the government reimburses you for reforestation costs under a cost-sharing program, you can amortize these costs only if you include the reimbursement in your income.

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 the following requirements.

1. It is located in the United States.
2. 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.
3. 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.

Amortization period. The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period.

Example. Last year (a full 12-month tax year), John Jones incurred qualifying reforestation costs of $8,400. His monthly amortization deduction ($100) is figured by dividing $8,400 by 84 months. Since it was the first year of the 84-month period, he can deduct only $600 ($100 × 6 months).

Annual limit. Each year, you can choose to amortize up to $10,000 ($5,000 if you are married filing separately) of qualifying costs you pay or incur during the tax year. You cannot carry over or carry back qualifying costs over the annual limit. The annual limit applies to qualifying costs for all your qualified timber property.

If your qualifying costs are more than $10,000 for more than one piece of timber property, you can divide the annual limit among any of the properties in any manner you wish.

Example. You incurred $10,000 of qualifying costs on each of four qualified timber properties last year. You can allocate $2,500 to each property, $5,000 to two properties, or the entire $10,000 to any one property, or you can divide the $10,000 among some or all of the properties in any other manner.

Partnerships and S corporations. A partnership or S corporation can choose to amortize up to $10,000 of qualifying reforestation costs each tax year. A partner's or shareholder's share of these amortizable costs is figured under the general rules for allocating items of income, loss, deductions, etc., of a partnership or S corporation.

The partner or shareholder is also subject to the annual limit of $10,000 ($5,000 if married filing separately) on qualifying costs. This limit applies to all the partner's or shareholder's qualifying costs, regardless of their source.

Example. You are single and a partner in two partnerships, both of which incurred qualifying reforestation costs of more than $10,000 for the year. Each partnership chose to amortize these costs up to the $10,000 annual limit. Your share of that $10,000 is $6,000 for one partnership and $8,000 for the other. Although your qualifying costs total $14,000, the amount you can amortize is limited to $10,000.

Estates. Estates can choose to amortize up to $10,000 of qualifying reforestation costs each tax year. These amortizable costs are divided between the estate and the income beneficiary based on the income of the estate allocable to each. The amortizable cost allocated to the beneficiary is subject to the beneficiary's annual limit.

Maximum annual amortization deduction. The maximum annual amortization deduction for costs incurred in any tax year is $1,428.57 ($10,000 × 7), or $714.29 ($5,000 × 7) if married filing separately. The maximum deduction in the first and last tax year of the 84-month amortization period is one half of the maximum annual deduction, or $714.29 ($357.15 if married filing separately).

Life tenant and remainderman. If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization (up to the annual limit) for reforestation costs incurred by the life tenant. Any remainder interest in the property is ignored for amortization purposes.

Recapture. If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. See chapter 3 of Publication 544 for more information.

Investment credit. Amortizable reforestation costs qualify for the investment credit, whether or not they are amortized. See the instructions for Form 3468 for information on the investment credit.

How to make the choice. To choose to amortize qualifying reforestation costs, enter your deduction in Part VI of Form 4562 and attach a statement that contains the following information.

• A description of the costs and the dates you incurred them.
• A description of the type of timber being grown and the purpose for which it is grown.

Attach a separate statement for each property for which you amortize reforestation costs.

Generally, you must make the choice on a timely filed return (including extensions) for the tax year in which you incurred the costs. However, if you timely filed your return for the year without making the choice, you can still make the choice by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach Form 4562 and the statement to the amended return and write "Filed pursuant to section 301.9100-2" on Form 4562. File the amended return at the same address you filed the original return.

Where to report. The following chart shows where to report your amortization deduction for reforestation costs after you enter it on Form 4562.

You cannot report your amortization deduction on Schedule C-EZ (Form 1040).

Partner or shareholder. If you are a partner in a partnership or a shareholder in an S corporation, see the instructions for Schedule K-1 (Form 1065 or Form 1120S) for information on where to report any allocated amortization for reforestation costs. However, if you have other reforestation costs you are amortizing, this deduction may be limited. See Annual limit, earlier.

Estate. If the estate does not file Schedule C or F for the activity in which the reforestation costs were incurred, include the amortization deduction on line 15a of Form 1041.

Revoking the choice. You must get IRS approval to revoke your choice to amortize reforestation costs. Your application to revoke the choice must include your name, address, the years for which your choice was in effect, and your reason for revoking it. You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your choice is to end.

Send the application to: Commissioner of Internal Revenue Washington, DC 20224

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