CONSERVATION CORNER
Reforestation Tax Law Will Be Helpful
by James L. Cummins

On October 22, 2004, President George W. Bush signed a tax restructuring bill that will have a major impact for forest conservation in Mississippi. And little did we know that it would be an important component in the reforestation of forests lost from Hurricane Katrina.

Debbie Gaddis of Mississippi State University's College of Forest Resources is the Southeast's premier expert on forest tax. Below, she shows us how it works.

Before October 23, 2004, reforestation expenses cannot be deducted. After October 22, 2004, landowners and lease holders may elect to deduct the first $10,000 of qualified reforestation expenses. This deduction is subtracted from gross income.

Forest landowners and lease holders may amortize (deduct over time) up to $10,000 in expenses each year according to a specific formula. The amortizable basis is actual expense, up to $10,000, less one half the tax credit taken. Amortization is reported on Form 4562 using the following schedule: 1st year 1/14th of amortizable basis, the 2nd year through the 7th year 1/7th of amortizable basis each year and in the 8th year 1/14th of amortizable basis. Election to amortize must be filed with a timely filed return. Amortization deduction is subtracted from gross income. Expenses over $10,000 each year can be amortized over 8 tax years. The amortization schedule is the same as before October 23, 2004. Amortization deduction is also subtracted from gross income as before. Election to amortize must be filed with a timely filed return.

Reforestation tax incentives apply to forest land in the United States that is at least one acre in size and owned or leased by a taxpayer. Individuals, partnerships and corporations may own qualified property. Property owned by trusts is ineligible for federal reforestation tax incentives. Only landowners with the objective of producing commercial timber species for future timber sales are qualified for reforestation incentives. Wildlife habitat plantings, horticultural plantings and Christmas tree plantings will not qualify. Qualified expenses include the cost of site preparation, purchase of tree seed or seedlings, labor costs to plant, tools and depreciation of equipment.

The limits for reforestation expenses tax incentives apply at both the partnership and individual level. Married couples, filing singly, are each limited to half the individual limits.

If the site preparation and reforestation costs are not recovered under the special provisions, then these costs are added to the timber basis account and recovered when the timber is sold. For more information see "Basics of Basis," MSU ES Publication 1983 available from Mississippi State University Forestry Extension at (662) 325 3905.

Other tax previsions that could greatly help those that suffered losses of forest and trees from Hurricane Katrina would be an enhanced reforestation tax credit and an adjustment of casualty loss.

The efforts of Senator Lott will benefit Mississippians for years to come. We appreciate his efforts to promote reforestation, especially in the aftermath of Katrina.