Reforestation cost-share funds arelimited in many ways—some pro-grams only pay for a limited numberof acres, some only apply for certainsituations, and sometimes the fund-ing is simply insufficient for thenumber of applicants. Landowners

who face this problem needto be aware that the federaland state tax systems pro-vide a way to recover refor-estation costs for commer-cial timber species. Areforestation deduc-tion, amortization, andeven a Mississippi taxcredit are available tomost taxpayers.Taxpayers in the

higher tax bracketsmay find that these tax incen-

tives reduce costs better than cost-share. Plus, there is no waiting in lineto qualify.

Federal Income TaxCongress has recognized that pri-

vate landowners need to recoverreforestation expenses quickly. Thecurrent tax remedy is to allow thelandowner to expense (deduct) up to$10,000 each year for the expensesincurred in reforestation. Anyamount over $10,000 is amortized ordeducted over 84 months using aspecific formula. These special provisions relate

only to landowners growing com-

mercial timber species.Landscaping trees or trees forwildlife are not deductible underthe federal provisions. Lands that are in a trust follow a

different rule. These landowners arenot allowed to expense the first$10,000. They may amortize the entireamount, however, over the standard84 months. The allowable deduction for refor-

estation costs in the GO Zone, or areasaffected by Hurricanes Rita, Wilma,and Katrina, was increased until 2008to an initial deduction of $20,000(rather than $10,000). Again, anythingover this amount is amortized ordeducted over time. This temporaryincrease is not available for landown-ers with more than 500 acres of tim-berland publicly traded, corporations,or real estate investment trusts.Allowable expenses include a wide

variety of practices—whatever is rea-sonable and necessary to create a com-mercial forest with seedlings that arefree to grow. These practices mightinclude clearing land, raking, piling,burning, subsoiling, applying herbi-cides, bush-hogging, fertilizing, disc-ing, and planting seedlings. Practicesshould be reasonable, ordinary, andnecessary—generally what the forestryindustry is willing to invest in gettinga forest of commercially valuablespecies established.

Paying for a New ForestWithout Cost-Share Funding

Let’s look at an example:Ned and Nellie Rowan wanted to reduce

their farming acreage and decided to plant200 acres of crop land with loblolly pine trees.They applied for cost-share from the NaturalResource Conservation Service and theMississippi Forestry Commission, but fundswere not available. Instead of waiting 1 to 2years for possible cost-share assistance, theRowans decided to invest their own moneyinto reforestation and recover costs with feder-al and state tax incentives. In 2005, the Rowans hired a consulting

forester to develop a reforestation plan, hire vendors, purchase seedlings, and ensure a quality job. The forester charged 5 percent above actual costs for this service. No site preparation was recommended because the land was still clean following an earlier crop harvest. A vendor agreed to plant 600 trees per acre for a fee of $45 per acre, or $9,000 for 200 acres. The Rowans chose to plant second- generation improved loblolly pine trees at a cost of $63.10 per thousand. To achieve a planting density of 600 per acre, 120,000 seedlings were purchased for $7,572. The total cost in 2005 to the Rowans was $17,400 ($16,572 plus 5 percent for the forester). Because the lands planted were outside

the GO Zone, the deduction limit was $10,000 on their federal income tax return. The remainder of $7,400 will be amortized over 84

months, or eight tax returns. The rules state that the first year’s amortization will be treat- ed as if it occurred on July 1—in essence, a half-year’s deduction. A year’s deduction will be taken for the next 6 years. The final half- year’s deduction will be taken in year 8 (Example 1).

Example 1. Using federal tax incentives to recover costs totaling $17,400.

Owners: Ned and Nellie Rowan

Amortization Tax Tax Incentives Amount DeductionDeduction in 2005 10,000Amortization Basis 7,400

2005 1/14 5292006 1/7 1,0572007 1/7 1,0572008 1/7 1,0572009 1/7 1,0572010 1/7 1,0572011 1/7 1,0572012 1/14 529

Ending Basis in Account 0

The Rowans will be able to claim reforestation expenses as part of their farming operation on Schedule F, Profit or Loss from Farming. In 2005, the initial deduction of $10,000 and $529 of amorti- zation were reported as “other expenses” (Table 1). Reforestation expenses are identified as “RFST” on tax forms.

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Table 1. The Rowans claim reforestation deduction and amortization on Schedule F, Profit or Loss from Farming.

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Table 2. The Rowans claim one-fourteenth of amortization basis the first year on Form 4562, Depreciation and Amortization. A similaramount will be claimed the eighth year. The deduction is reported on Schedule F.

Table 3. The Rowans will claim one-seventh of amortization basis the second through seventh years. The deduction will be reported onSchedule F.

Amortization deductions are first recorded on Form 4562, Depreciation and Amortization, Part VI (Table 2). The reference to Section 194 of the Internal Revenue Code

guides the IRS agent handling the return to look up the provision. The amortized amount reported on Form 4562 is then transferred to Schedule F (Table 1).

An election or notice is required for the first of these amortization deductions. The Rowans made their election in 2005 on a plain piece of paper, but they could have used Form T: Forest Activities Schedule, Part 4, Reforestation and Timber Stand Activities. This election states how much was spent, the date they spent it, practices involved, species of timber planted, and the purpose of grow- ing timber (Example 2).

Example 2. Election to amortize costs under Section 194, IRC.

Ned and Nellie Rowan attached this to Form 4562:Under Section 194, we elect to amortize $7,400 of refor-estation expenses in Any County, Mississippi. Payment was made on January 27, 2005. The 84-month amortization period begins July 1, 2005. The expenses were for plant-ing improved loblolly pine seedlings for commercial timber pro-duction on the tract known as Granny B’s Farm.

For their 2006 tax return, the amortization deduction will increase to $1,057 as shown in Table 3. They also will transfer the amortiza- tion deduction onto Schedule F (as shown previously in Table 1). The Rowans will con- tinue to file the appropriate amortization deduction until they have deducted all their reforestation costs.

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Table 4. Example of an investor reporting a $10,000 reforestation deduction plus a $529 amortization deduction.

Not all forest landowners should use ScheduleF. If the forest is not part of a farming operation, itmay be considered either a business or an invest-ment. Business owners would use Schedule C orother appropriate business forms instead ofSchedule F. Investors would file their initial deduc-tion and amortization deduction on the front of the1040 as shown in Table 4.

Investors should never take the reforestationdeduction as a miscellaneous itemized deduction.Instead, they should place it as shown in Table 4,writing in “RFST” and the deduction on the next-to-last line of the Adjusted Gross Income sectionon IRS 1040.

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Mississippi Income TaxMississippi offers a tax credit for new forest

establishment. The requirements are somewhatdifferent than those for the federal tax incen-tives. Only Mississippi taxpayers reforestingMississippi land may claim a credit on Form80-315. The tax credit allows Mississippi tax-payers to recover up to 50 percent of the cost ofqualified expenses, for a lifetime maximumcredit of $10,000. The lifetime credit wasincreased to $75,000, effective January 1, 2007.Since the Mississippi Reforestation Tax

Credit is applied to taxes owed, the taxpayerreduces his or her tax burden by the amount ofthe tax credit. This credit is much better than adeduction, where the reduction in taxes paidequals the amount of the deduction times themarginal tax rate. For example, a $100 tax cred-it reduces taxes by $100, but a $100 deductionfor a taxpayer in the 25 percent tax bracketreduces his tax by $25. Using the Mississippi Reforestation Tax Credit

requires the services of a registered or graduateforester. The forester prepares a simple prescrip-tion of practices, including a map of the area andlegal description of the property. He or she alsosigns the Mississippi Reforestation Tax Creditform to certify that the plan was made and thework was carried out. Consulting foresters routinely help landown-

ers claim reforestation credit. Their services maybe included as part of their duties following atimber sale. Otherwise, services are negotiated fora fee. Another source of help is foresters who arealso vendors who plant seedlings and/or preparesites for planting. The Mississippi ForestryCommission office also can prepare a plan. Thecost is a contract rate, based on the actual cost ofproviding the service.

There are limitations onthe use of the MississippiReforestation Tax Credit.Generally, tax credit andcost-share cannot be claimed forthe same acreage the sameyear. They may be used at thesame time only when a tax-payer’s adjusted gross incomeis below the federal income credit level. In 2005,this amount was $37,263 for a married couple fil-ing jointly with two children. Also, for land owned by a pass-through entity

such as a partnership or an s-corporation, the lim-its to using the tax credit apply to the pass-through entity level as well as to the investor.Married couples can each have a $10,000 credit ifthey own land individually and pay for practiceson their individually owned properties. If theirland is owned jointly, their total limit is $10,000for the couple. Under the new law, the limit willbe $75,000 instead of $10,000 as of January 1, 2007.

Let’s see how the Rowans use the MSRTC:

The Rowans are Mississippi taxpayersplanting in Mississippi. Therefore, they areeligible to use the Mississippi ReforestationTax Credit. Their consulting forester wrote therequired plan for the Rowans as part of thetotal tree planting cost and oversaw the plant-ing of trees. The Rowans filled out the cost worksheet

for the Mississippi Reforestation Tax Credit(Form 80-315) as shown in Table 5. Their con-sultant signed the form and mailed a copy ofthe worksheet to the Mississippi ForestryCommission as required.

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The Mississippi Reforestation Tax Credit lim-its the per-acre cost of each practice. These limitsare based on cost-share rates and are changedyearly. As a result, the amount eligible for theMississippi Reforestation Tax Credit may be lessthan the actual amount spent. The lesser value isused to compute the 50 percent tax credit. In ourexample, the Rowans actually spent $17,400, butthe allowable upper limit is $15,200 as deter-mined by filling out the worksheet (Table 5). TheRowans then transferred the lower value to thefront of Form 80-315 and took a tax credit of 50percent of $15,200, or $7,600. This reduced their

Mississippi taxes by $7,600. If they are unable touse all the credit now, they will carry it forwarduntil it is totally used.After subtracting the tax credit, the remainder

may be claimed as a reforestation deduction oramortization using federal guidelines. TheMississippi State Tax Commission has not rewrit-ten the MSRTC regulations following the changesin federal reforestation tax due to the 2004American Jobs Creation Act. We have used ourbest estimate of the way to handle these expens-es. Check with your tax advisor for advice basedon your particular facts and circumstances.

Table 5. The allowable upper limit for reforestation expenses was calculated by the Rowans. This cost worksheet is on Form 80-315,Mississippi Reforestation Tax Credit 2005.

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Table 6. Estimated recovery of reforestation costs by the Rowans using federal and Mississippi tax incentives. A federal marginal tax rateof 25 percent and a 5 percent Mississippi rate are assumed.

Federal Value of Deduction Mississippi Value of Deduction TotalTax (deduction x .25 Tax Tax (deduction x .05 Savings

Year Deduction marginal tax rate) Credit Deduction marginal tax rate) in Taxes

2005 10,529 2,632 7,600 9,800 490 10,7222006 1,057 264 2642007 1,057 264 2642008 1,057 264 2642009 1,057 264 2642010 1,057 264 2642011 1,057 264 2642012 529 132 132

Savings in Taxes 4,350 7,600 490 12,440

Net Investment Using the federal tax incentives and

Mississippi Reforestation Tax Credit enableslandowners to recover a good portion of theirreforestation costs. Each landowner’s actual recov-ery percentage will vary according to the marginaltax rate of the individual and the amount actuallyspent. If a landowner has taxable Mississippiincome, it may be much more advantageous to usethe Mississippi Tax Credit than to obtain cost-sharefunding for the forest establishment costs.

Returning to our example again:The Rowans are in the 25 percent federal

marginal tax bracket and the 5 percentMississippi tax rate. Their total expenses for

reforestation were $17,400. Their cash recov-ery was $12,440 as shown in Table 6. If theRowans had waited for cost-share, theywould have only saved a total of $10,540 (60percent of cost recovered). The cost-share pay-ment would have been $7,600, federal tax sav-ings $2,450, and Mississippi tax savings $490.As can be seen from Table 6, the Rowans

recovered 62 percent of their investment inthe first year, largely due to the MississippiReforestation Tax Credit. At the end of theeighth year, they had recovered 71 percent oftheir investment. Of course, this does not takeinto account the time value of money, but itstill shows a significant reduction in the costof investing in a new forest.

Copyright 2014 by Mississippi State University. All rights reserved. This publication may be copied and distributedwithout alteration for nonprofit educational purposes provided that credit is given to the Mississippi StateUniversity Extension Service.

By Deborah A. Gaddis, PhD, former Associate Extension Professor, and Stephen G. Dicke, PhD,Extension Professor, Forestry.

Discrimination based upon race, color, religion, sex, national origin, age, disability, or veteran’s status is aviolation of federal and state law and MSU policy and will not be tolerated. Discrimination based uponsexual orientation or group affiliation is a violation of MSU policy and will not be tolerated.

Publication 2420Extension Service of Mississippi State University, cooperating with U.S. Department of Agriculture.Published in furtherance of Acts of Congress, May 8 and June 30, 1914. GARY B. JACKSON, Director

(POD-02-14)

SummaryWe encourage landowners to compare tax

incentives to cost-share. Your individual factsand circumstances will determine which is best.Tax incentives are very attractive especially whenlandowners are placed on waiting lists for cost-share funds. Reforesting now with tax incentiveswill usually beat waiting 2 or 3 years for cost-share. Waiting for cost-share can increase sitepreparation costs by allowing weeds and brushto become well established on the planting orseeding site. It also increases the wait for harvestreturns from the new forest, thus reducing over-all net returns. Taxpayers who reforest theirproperty may be pleased to find that their taxincentives could exceed cost-share payments interms of cost recovery.

Information SourcesThis publication provides some guidance to

landowners who are ready to invest in a newforest without using cost-share. Your individualsituation may not be exactly the same as theexample used for illustration. In particular, landsheld in trusts are not eligible for some of theseprovisions, and hobby owners are ineligible. Formore details on taxation and forest establish-ment costs, please contact Mississippi StateUniversity Extension Forestry at (662) 325-3905or find the National Timber Tax website atwww.timbertax.org. Here are several free publi-cations that may provide further information onrecovering the costs of establishing a new forest:

Information for Taxpayers Affected byHurricanes Katrina, Rita, and WilmaIRS Publication 4492. Available fromwww.irs.gov, or order from the IRS tax hotlineat (800) 829-3676.

Farmers Tax GuideIRS Publication 225. Available fromwww.irs.gov, or order from the IRS tax hotlineat (800) 829-3676.

Timber Tax OverviewMSU Extension Publication 2307. Available fromwww.msucares.com, or call your local countyExtension office to request a copy.

2005 Tax Tips for Forest LandownersU.S. Forest Service Publication (updated eachyear with changes in the federal tax code relat-ing to forestry). Download fromwww.fs.fed.us/spf/coop/.

Form 80-315 Mississippi Reforestation TaxCredit and 80-315i Instructions for MississippiReforestation Tax CreditDownload current forms and instructions fromthe Mississippi Department of Revenue websiteat www.dor.ms.gov. Under the Forms tab, selectIncome Tax Forms for the current year, thenIndividual Income Tax. There, you will findforms 80-315 and 80-315i. To request forms bemailed, call (601) 923-7000.