Tax Considerations for the Establishment of Agroforestry Practices
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Larry D. Godsey
Center for Agroforestry
Agroforestry is often promoted for its conservation benefits and potential income diversity. However, federal tax incentives may provide the greatest benefit to some landowners. Accordingly, agroforestry tax advantages can also be derived from three areas: reforestation, business investment and conservation tax laws. These three areas of the Internal Revenue Code (IRC) are reviewed in this document.
According to the Internal Revenue Service (IRS), a farm business is defined as "the trade or business of cultivating land or raising or harvesting any agricultural or horticultural commodity. This includes . . . raising or harvesting of trees bearing fruits, nuts, or other crops.."
The IRS also says "you are not farming if you are engaged only in forestry or the growing of timber." This seems to complicate the position of the taxpayer who has adopted agroforestry practices for the production of both agricultural commodities and timber. However, because agroforestry consists of raising trees and agricultural commodities, tax advantages for the agroforester can come from both forestry and farming incentives.
There are three possible tax incentives for landowners who choose to plant trees for timber production. These incentives are described in section 126, section 48 and section 194 of the IRC.
Reporting cost-share payments and the section 126 exclusion
Landowners who have received a conservation cost-share payment can expect to receive IRS Form 1099-G, which indicates the total amount of payment received. Regardless of whether this payment is going to be partially or completely excluded, it must be reported. In order to report the exclusion, the taxpayer must attach a plain sheet of paper to their tax return that states the following:
- Amount of the cost-share payment
- Date it was received
- Amount of the payment that qualifies for exclusion from gross income
- Calculations showing how the exclusion
- Amount was determined
- Amount that will be excluded
Section 194 and section 48
Section 194 of the Internal Revenue Code describes the reforestation amortization deduction and provides guidelines for the reforestation investment tax credit of section 48. Both of these incentives are directed towards "commercial timber production"and are applicable to agroforestry.
Business investment incentives
As a landowner engaged in an active farming or forestry business, section 179 of the IRC provides a special deduction for personal property. Personal property that is used more than 50 percent in a farming or forestry business qualifies for the deduction.
AF1004, revised March 2010