Mississippi legislation grants non-industrial private forest landowners a significant ability to recover forest investment using the Mississippi Reforestation Tax Credit (RTC) of $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 the following federal and state tax provisions to recover their reforestation expenses to maximize their forest investment returns.
Type of lands that qualify: Forestland, former forestland
Type of program: Incentive
Monetary benefit: State tax credit
How it Works
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 a casualty or non-casualty business losses. This means the landowner will not be able to recover investment costs until they sell timber or claim a loss.
Qualifying Costs for the Mississippi Reforestation Tax Credit
Fortunately, the IRS code allows taxpayers, except trusts, to recover reforestation costs at an earlier point in time. (Trusts follow special rules not discussed here.) Under these rules, up to $10,000 in reforestation expenses for a qualified timber property per year may be deducted. For expenses over $10,000, the overage may be amortized or deducted over 84 months.
Some landowners may receive cost-share funding from government agencies, such as the Farm Service Agency, the Natural Resources Conservation Service, the U.S. Fish and Wildlife Service, 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; your costs associated with these cost-share payments are treated as expenses.
There are restrictions on using 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.
Value of a Tax Credit versus a Deduction
A tax credit has much more impact on taxes owed than a deduction since it 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 X .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 X .40 = $36,000 means you are paying $36,000 in taxes. You saved $4,000.
Mississippi Reforestation Tax Credit Example
A landowner has 100 acres of eligible land they want to reforesting in loblolly pine in northeast Mississippi. The RTC can be applied for 50% of the reforestation cost, not to exceed $10,000 in any year.
- Site preparation (herbicide and burning):
- Seedlings & tree planting: $175/acre
Site Preparation (Herbicide and Burning): $140/acre × 100 acres = $14,000
Tree Seedlings and Tree Planting: $175/acre × 100 acres = $17,500
Total Reforestation Costs = $31,500
Tax Credit 50% (Maximum is $10,000) = $10,000
Landowner Costs = $21,500