Managing your forestland can be an excellent long-term investment. Over the years, income from managed forest stands could be substantial, depending on initial investment, markets, and various factors affecting productivity. Even managed pre-salable timber stands have increased the property value of forestland significantly compared to bare or unmanaged, cutover woodland. The range of returns is wide because of variations in soil productivity, stand condition, tree species, markets (both availability and price fluctuations), intensity of management, and availability of financial incentives from state and federal agencies.
Federal and state governments offer financial incentive programs for woodlot owners. Several of these programs provide cost sharing payments that reimburse landowners for various timber management activities. Other programs provide tax incentives, tax credits, and deductions for reforestation expenses.
Cost Sharing Programs
The North Carolina Forest Development Program (FDP) is a reforestation cost share program administered by the North Carolina Forest Service (NCFS). Under the FDP, a landowner is partially reimbursed for the costs of site preparation, seedling purchases, tree planting, removal of vegetation competing with desirable seedlings, and many other practices needed to establish and improve timber stands. Landowners must have a forest management plan approved by NCFS to qualify for this assistance. The FDP currently reimburses the landowner for as much as 40 percent of the actual cost per acre or 40 percent of the prevailing rate for most of the site preparation and management practices in the region, whichever is less. The cost share rate increases to 60 percent for the planting of longleaf pine, hardwoods, or wetland species. Any private individual, group, association, trust, LLC, or corporation may qualify with as little as 1 acre and up to 100 acres per year. Landowners may sign up by contacting the nearest NCFS ofﬁce. To learn more about the FDP or other cost share programs administered by NCFS, contact the county forest ranger or visit the NCFS website.
The North Carolina Agriculture Cost Share Program (ACSP) is intended to address nonpoint source pollution by reducing runoff of sediment, nutrients, animal wastes, and pesticides into the state’s surface waters. The program offers cost share reimbursements for the installation of best management practices (BMPs), such as the establishment of covers and conversion of fields. Participating landowners are reimbursed for as much as 75 percent of the average cost of the forest management practices used, including the use of existing material and labor. To be eligible for this program, landowners must have had existing agricultural operations for more than three years. The local North Carolina Soil and Water Conservation Districts administer the program. Contact your district office, the NCFS, or your Cooperative Extension center for information on the availability of funds in your county.
The Conservation Reserve Program (CRP) protects millions of acres of highly erodible, marginal cropland and is designed to safeguard the nation’s natural resources. Landowners who enroll during the CRP “general signup” agree to retire cropland to produce permanent wildlife habitat or to grow trees, permanent introduced grasses and legumes, permanent native grasses and legumes, or combinations of permanent covers. Those landowners that participate in the CRP “continuous signup” may receive payments for conservation on working lands, such as forests. Enrollment practices vary but may include establishment of longleaf pine, forested riparian buffers, wetland restoration, and bottomland hardwood.
The Farm Service Agency (FSA) will reimburse participating landowners for as much as 50 percent of the cost of establishing permanent covers and will also pay an annual rental fee over a 10- to 15-year contract period. Retired acreage may not be grazed, harvested, or used in any commercial manner other than for hunting leases during the 10-year period. Landowners need to sign up for the conservation practices they are interested in during enrollment periods. For sign-up information, contact your local FSA ofﬁce.
The Environmental Quality Incentive Program (EQIP) is an agricultural production and environmental conservation program that provides financial and technical assistance for installing practices on eligible agricultural land and forestland. EQIP contracts may fund forest management practices such as forest stand improvement, fire break installation, prescribed burning, restoration and management of declining forest habitats, and tree establishment. EQIP provides a flat payment for practice installation based on 75 percent of the average costs of conservation practices (or more for historically underserved groups). EQIP activities must be carried out according to a comprehensive management plan approved by a Natural Resources Conservation Service (NRCS) agent in your conservation district. The NRCS evaluates applications and gives high priorities to applicants who use cost-effective practices that address national conservation priorities and optimize environmental benefits. Portions of the Wildlife Habitat Incentives Program (WHIP) were rolled into EQIP. The NRCS will continue to support existing active WHIP contracts entered prior to passage of the Agricultural Act of 2014. Details about EQIP enrollment and program eligibility are available from your local NRCS office.
Tax Credits and Deductions
Reforestation Tax Credit and Amortization Deduction. Landowners may claim up to $10,000 (married filing jointly) in federal income tax deductions annually for qualifying reforestation expenses per qualified property in the year incurred. The cost of site preparation, seedlings or seeds, planting, tools, and depreciation on equipment may be included. Cost share funds may also be deducted if they are reported as landowner’s income. In addition, landowners can deduct (amortize) all incurred reforestation expenses in any one year that cannot be expensed, without limit to the amount. These expenses can be deducted from gross income that comes from other sources over an 84-month period.
Excluding Cost Sharing Payments from Income. Federal and North Carolina tax laws allow a landowner to exclude certain cost share payments partially or totally from taxable income. Check with a tax advisor to see which tax laws and programs are applicable to your case. Most people will gain maximum tax advantage, however, by including the payments as income and reporting any unreimbursed expenses that qualify for the investment credit and amortization deductions discussed in the previous section.
Annual Deductions. Part or all the management expenses incurred each year may be deductible, even if no timber income is received in that tax year. The Tax Reform Act of 1986 instituted passive loss rules that dictate how a forest landowner may deduct expenses. The excess amount over $10,000 can be deducted using an amortization schedule over the subsequent eight tax years. Three classes of ownership, based on extent of participation in management of the property, are deﬁned:
- Material participants in a trade or business. In this class, all management expenses and business interests are fully deductible from income from any source.
- Materially participating investor. Property taxes are fully deductible; interest on indebtedness related to the timber is deductible only up to the amount of investment income from all sources; and all other management expenses are deductible as miscellaneous itemized deductions.
- Passive participants in a trade, business, or investment. Management expenses can be deducted only up to the amount of passive income from all sources.
Material participation requires active, regular, continuous, and substantial involvement. Accurate record-keeping and consultation with a tax expert are recommended because these records may be needed in the case of auditing and verification from the Internal Revenue Service. In addition, most unclaimed annual management expenses may not be capitalized and recovered in future years when the timber is sold.
According to the Tax Cuts and Jobs Act of 2017, the miscellaneous itemized deductions, including timber expenses (fees paid for foresters, attorneys, hired labor, property taxes, pre-commercial thinning, and overnight travels), are no longer deductible in years without a timber harvest (to offset). For investment properties, expenses must be capitalized in a timber or land account and held until a sale year; they can be deducted upon sale of the timber. For timber business properties, timber expenses are still deductible.
Long-Term Capital Gains. Income from the sale of timber owned for more than 12 months should qualify as long-term capital gains for federal tax purposes. An individual may wish to report timber income as long-term capital gains for several reasons:
- Capital gains may be used to offset capital losses. A landowner with large capital losses may use capital gains to offset those losses in that tax year.
- Self-employed landowners must pay self-employment taxes. Capital gains are exempt from self-employment taxes.
- Capital gains from involuntary cutting, if reinvested in timber management within a certain time, are not recognized as taxable income and taxes are deferred.
- The long-term capital gains tax rate is 15%, with additional 3.8% Medicare surtax if the family annual income is more than $321,408. The rate is 20% if the annual income is more than $612,351.
- North Carolina income tax law does not recognize long-term capital gains income; therefore, all income is ordinary.
The North Carolina Forestry Present-Use Valuation (PUV) is a voluntary tax break program through which qualifying North Carolina forest landowners can receive, upon approval of their application, property tax relief for managed timberland. Land that qualifies for the PUV program is assessed at its present-use value rather than its market value. Typically, the present-use value is substantially lower than its market value. To be eligible, the land must be:
- individually owned, including ownership by certain types of corporations;
- in compliance with a written, sound forest management plan for the production and sale of forest products;
- within a parcel of land in actual timber production composed of at least 20 acres not included in a farm unit; and
- occupied by the owner. In addition, the land must have been owned by the present owner for four years preceding January 1 of the year in which application for special assessment is made. If the land is currently under present-use valuation in which the deferred taxes remain a lien on the land, the new owner becomes liable for the deferred taxes, and the deferred taxes become payable if the land fails to meet any other condition or requirement for classification. The county tax supervisor accepts applications during the regular listing period. The amount of tax relief varies widely by county. Contact your county tax assessor or see the publication North Carolina’s Forestry Present-Use Valuation (PUV) Property Tax Program: Woodland Owner Notes.
For more information on tax credits and deductions, visit the National Timber Tax Website.
For additional information, contact your Cooperative Extension center, a qualiﬁed tax expert, the Internal Revenue Service, a consulting forester, or a representative of the NCFS. For information about other conservation programs, see the NC State Extension publications Voluntary Conservation Options for Land Protection in North Carolina: Woodland Owner Notes and Farm Bill 2018: Programs of Interest to Forest Landowners.
Publication date: Jan. 1, 2011
Revised: Dec. 7, 2020
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