Saturday, January 12, 2013

Tax Break for Christmas Tree Farmers

The Internal Revenue Code has different tax rates for ordinary income and capital gains.  Capital gains, which are generally taxed at a lower rate, tend to be gains from investment assets held for a relatively long period of time.  Capital assets do not include inventory sold to customers in the ordinary course of business.  A farmer who sells cows and oranges, for example, would pay taxes on ordinary income. 

Internal Revenue Code section 631 effectively allows timber to be sold at capital gain rates.  This loophole, which has been around for a while, has greatly benefited the Oregonian timber lords.

Timber would normally be wood products like oak and cedar.  But section 631 helpfully clarified that the term “timber” includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes.  Most Christmas trees qualify under this provision, since they take six to twelve years to be fully grown.

But the Big Christmas Tree industry is not satisfied with just one tax break (that reduces its tax rate from 35% to 15%). 

Internal Revenue Code section 263A contains rules on whether farmers can deduct their expenses in growing crops, or whether they have to capitalize the costs (and amortize it over time or benefit from the deduction only when they finally sell their crops).  Christmas tree farmers can deduct all of their expenses immediately, while other tree farmers (and general crop farmers) must wait several years until they sell the trees before they can benefit from the deduction. 

The above rules also apply to Christmas trees grown abroad by multinational Christmas Tree corporations.

§ 263A Capitalization and inclusion in inventory costs of certain expenses.

    (a) Nondeductibility of certain direct and indirect costs.
      (1) In general.
      In the case of any property to which this section applies, any costs described in paragraph (2) —
        (A) in the case of property which is inventory in the hands of the taxpayer, shall be included in inventory costs, and
        (B) in the case of any other property, shall be capitalized.
      (2) Allocable costs.
      The costs described in this paragraph with respect to any property are—
        (A) the direct costs of such property, and
        (B) such property's proper share of those indirect costs (including taxes) part or all of which are allocable to such property.

      Any cost which (but forthis subsection ) could not be taken into account in computing taxable income for any taxable year shall not be treated as a cost described in this paragraph.
(c) General exceptions.
(5) Timber and certain ornamental trees.
    This section shall not apply to—
      (A) trees raised, harvested, or grown by the taxpayer other than trees described in clause (ii) of subsection (e)(4)(B) (after application of the last sentence thereof), and
      (B) any real property underlying such trees.  

      *** (e)(4)(B)(ii)
(ii) the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees.

For purposes of clause (ii), an evergreen tree which is more than 6 years old at the time severed from the roots shall not be treated as an ornamental tree.

Section 631 (a) Election to consider cutting as sale or exchange.
If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than 1 year) shall be considered as a sale or exchange of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor. If a taxpayer makes an election under this subsection, such election shall apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding on the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the Secretary, on showing of undue hardship, permits the taxpayer to revoke his election; such revocation, however, shall preclude any further elections under this subsection except with the consent of the Secretary. For purposes of this subsection and subsection (b) , the term “timber” includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes.

1 comment:

  1. Don't be the grinch that killed Christmas tree tax breaks! Just kidding, this is very interesting.