‘Tis the season to be jolly, and how jolly could we be without Christmas trees on display? For some of us it’s the classic Pinus Sylvestris, or scotch pine. For others it’s the soft-needled Abies fraserie, or Fraser fir. Still more make do with the store-bought plasticus annualensis, or “Target special.” (Artificial trees can be beautiful, too!) Christmas trees are a festive symbol of holiday spirit, and most of us can’t help but smile when we see one. (Unless we’re at a department store in August.)
We’re pretty sure that taxes are the last thing you think about when you see a gaily-decorated tree. But this is a tax column you’re reading, and part of the fun is taking something you think has nothing to do with taxes, and showing how they fit behind the scenes. With that in mind, let’s look at how the IRS treats your tree’s trip from the stump to the stand.
Code section 631(a) states that, “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.” That makes Christmas tree farming a business and not an investment. But timber lobbyists have been busy little elves, and they’ve found some presents to leave under the growers’ trees:
- To maximize their deductions, growers need to keep careful records. This might involve separate accounts for merchantable timber (measured in thousand board feet), young growth timber, deferred forestation, and reforestation amortization assets.
- Unfortunately, trees planted for ornamental purposes don’t qualify for the reforestation amortization deduction. (How’s that for a lump of coal in a stocking?) Instead, growers capitalize planting costs and add them to their plantation account, then recover them as they harvest the trees for sale.
- On the bright side, Revenue Ruling 71-228 clarifies that pruning and shearing costs are currently deductible business expenses, not capital expenditures.
- “Occasional producers” who sell on the stump might take advantage of lower capital gains rates by establishing on-site sales procedures to qualify under Section 631(b). But beware Revenue Ruling 77-229, which held that income from “choose and cut” operations are ordinary income unless the grower makes a special election to determine gain or loss under the rules of Regulations Section 1.631-1(e)(1).
It’s all enough to make you reach for the straight bourbon instead of the eggnog!
Try thinking about it this way. The tax code itself is really just one giant Christmas tree! It starts with the trunk, branches, and needles — the sections imposing the tax and setting the rates. Then Washington tarts it up with lights, ornaments, tinsel, and candy canes — the deductions, credits, loopholes, and strategies you hang on your return to lower your bill. (Cynical scrooges might even say we have too much hanging on that tree, but that’s a discussion for a different day.)
Here’s wishing you and your family the happiest holiday this season, however you celebrate. We’ll be back in 2017 to make sure you pay as little tax as possible, not just during the holidays, but all season long!
J. Barry Watts, Tax Strategist and Retirement Designer. 417-865-0936