Income Tax Deduction for Reforestation or Forestation of Farmland

If you have farmland that you decide to forest or reforest, you may qualify for a current year income tax deduction for all or a portion of your costs. And you may be able to amortize the rest of your costs over a 7-year period. There is no annual limit on the amount you can amortize.

According to the IRS, the reforestation or forestation costs that qualify for the current year deduction and then amortization of the balance over 7 years include site preparation, seeds or seedlings, labor, tools, and depreciation on the equipment you use in planting and seeding. You would have to reduce your costs by any reimbursement you receive from a government or other cost-sharing program.

The property you reforest or forest must be considered qualified timber property. For U.S. income tax purposes this means land in the United States that you hold for growing and cutting timber that you will use or sell. It must be at least one acre planted with tree seedlings.

You can deduct up to $10,000 ($5,000 if married filing separately) of reforestation or forestation expenses in the year you incur the expenses. The deduction is claimed on Schedule F, Profit or Loss from Farming, under Other Expenses on line 34. If you file Form T (Timber), Forest Activities Schedule, you can claim the deduction in Part IV of that form. If you are not required to file Form T, you should attach a statement to your tax return indicating the unique stand identification numbers, the total number of acres you reforested, the nature of the reforestation treatments, and the total amount of the expenses you can deduct or amortize.

The deduction for the amortization of the balance of reforestation or forestation costs you cannot deduct in the current year is claimed in Part VI of Form 4562, Depreciation and Amortization. You should attach a statement to your return describing the costs and the dates you incurred them, and the type of timber being grown and its purpose.

According to the IRS, you can claim six months of amortization the year you incur the reforestation or forestation costs, regardless of the month in which you actually incur the costs. Then you can claim one year of amortization for years two through seven, and the other six months in the eighth year.

If you sell or dispose of the timber property within 10 years after you incur the reforestation or forestation costs, you would have to recover the amortization as ordinary income instead of capital gain on the sale or disposition.

Sources:

Form 4562, Depreciation and Amortization, IRS

Form T (Timber), Forest Activities Schedule, IRS

Instructions for Form 4562, IRS

Instructions for Schedule F, IRS

Publication 225, Farmer's Tax Guide, IRS

Publication 535, Business Expenses, IRS

Reforestation Expenses, National Timber Tax Website