Through the Federal Reforestation Tax Credit, the Internal Revenue Service (IRS) offers landowners a voluntary 10% investment tax credit for planting trees.
Type of lands that qualify: Forestland, former forestland
Type of program: Incentive
Monetary benefit: Tax credit
How it Works
The law provides a 10% tax credit on qualified reforestation expenditures. The credit is a direct reduction from the taxes you owe.
The landowner can also elect to amortize (deduct) up to 95% of qualified reforestation expenditures over a 7-calendar-year period. The amortization may be done with the 10% tax credit or independently.
Value of a Tax Credit Versus a Deduction
deduction. A tax credit reduces the taxes owed by the credit amount. In contrast, a deduction reduces tax by the amount of the deduction times the marginal tax rate. It is a reduction in your overall taxable income.
For example, with a tax credit, if your income is $100,000, you are paying 40% of your income in taxes, and have a $10,000 tax credit, then your benefit is as follows: $100,000 × .40 = $40,000 – $10,000 means you are paying $30,000 in taxes. You saved $10,000.
With a tax deduction, if your income is $100,000, you are paying 40% of your income in taxes, and have a $10,000 tax deduction, then your benefit is as follows: $100,000 – $10,000 = $90,000 (your new taxable income). $90,000 × .40 = $36,000 means you are paying $36,000 in taxes. You saved $4,000.
Qualifying Costs
According to the tax code, reforestation expenses refer to direct costs paid for establishing the stand of trees. These include
- site preparation,
- seeds or seedlings ,
- chemicals needed to prepare the land
- labor and tools, including depreciation on equipment
Work completed to encourage natural regeneration is also eligible.
Landowners can plant a few acres of trees using the Environmental Quality Incentives Program, Conservation Reserve Program, or the various other programs out there and take advantage of the reforestation investment tax credit.
Federal Reforestation Tax Credit Example
A landowner mows the field, sprays the rows to be planted with herbicide, adds nutrients to the soil, purchases the trees, plants the trees, and then places tree shelters on one-half of the trees. They spend $25,000 on a 30-acre planting for this work.
With the 10% investment tax credit, they can directly deduct $2,500 from the amount owed to the IRS for that year.
They can then amortize 95% of the $25,000 over 7 years. Amortization deductions are subtracted from their gross income, meaning this amount can be deducted even if they do not itemize.
