James L. Cummins
Investing in Forests by James L. Cummins
In 2006, the Mississippi legislature granted non-industrial private forest landowners a significant increase in the ability to recover forest investment by increasing the lifetime limit of the Mississippi Reforestation Tax Credit (RTC) of $25,000 to $75,000. The RTC is a 50% tax credit, which means the tax credit amount is 50% of the approved costs of practices implemented. Landowners should use both federal and state tax provisions to recover their reforestation expenses to maximize their forest investment returns. Here’s a general overview of a few federal and state tax provisions to allow landowners to assess their options:
General Capital Asset Recovery: Non-depreciable capital investments, such as land and timber, must be capitalized and recovered when the investment is sold or claimed as a loss. This is true for both federal and state income tax. When costs are capitalized, they are recorded into a basis account. The basis is used to offset gains or losses from the sale of an asset or to claim casualty or non-casualty business losses. This means the landowner will not be able to recover investment costs until he or she sells timber or claims a loss.
Special Federal Reforestation Recovery Rules: Fortunately, the IRS code allows taxpayers, with the exception of trusts, to recover reforestation costs at an earlier point of time. Under these rules, each year up to $10,000 in reforestation expenses for a qualified timber property may be taken as a deduction. For expenses over $10,000, the overage may be amortized or deducted over 84 months.
Cost-sharing and Taxes: Some landowners may receive cost-share funding from federal agencies or the Mississippi Forestry Commission. These agencies have special programs that pay for part of the costs of some practices. Remember that cost-share payments are treated as income.
Mississippi Reforestation Tax Credit: Mississippi taxpayers have the additional benefit of a tax credit for reforestation. The tax credit covers up to 50% of approved costs of site preparation and regeneration. The upper limit on the total amount of tax credit that may be claimed during the taxpayer’s lifetime is $75,000.
Value of a Tax Credit versus a Deduction: A tax credit has more impact on taxes owed than a deduction since it reduces the taxes owed by the credit amount. A deduction reduces tax by the amount of the deduction times the marginal tax rate.Restrictions and Eligibility: There are restrictions on the use of the RTC for landowners who receive cost-share. Generally, landowners who receive cost-share cannot claim the Mississippi tax credit on their unreimbursed costs of the expense unless their adjusted gross income is below the federal earned income credit levels.Forestry Investment is a Good Investment: Investing in commercial forests has proven to be a good investment. The National Council of Real Estate Investment Fiduciaries reported returns of around 19% on U.S. timberland from 2019-2020.
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