Owning a tree farm can be an effective way to do your part for the environment, and most businesses of this type qualify for certain tax deductions. Once you start operating this type of business, it is important to know which of the expenses you incur are tax deductible so you can reduce your tax liability.
If you own a tree farm, you will likely be able to deduct a variety of expenses, including equipment and labor costs, as well as vehicle mileage.
Exploring Labor Expenses
When running a tree farm, you most likely need to pay employees to help you manage it. When you pay for labor expenses such as wages and benefits, the Internal Revenue Service allows you to deduct these costs. If you have employees, you will also need to withhold part of their paychecks for federal and state taxes. As an employer, you also pay part of your employee's payroll taxes in the form of Social Security and Medicare taxes.
Capital Gains Tax Breaks
One of the potential tax breaks available to tree farm owners is that sales of trees are taxed at capital gains tax rates. If you own the tree for at least 12 months, you are taxed at the long-term capital gains tax rate. Instead of paying taxes on the tree sale at your regular marginal tax rate, which is higher, you get to pay taxes on it at the lower capital gains rate. Some lower-income individuals benefit from a long-term capital gains tax rate of 0 percent.
Equipment and Supplies
When operating a tree farm, you will most likely need to own many different pieces of equipment and buy supplies regularly. When you purchase equipment expected to last longer than one year, the IRS lets you depreciate it over its useful life to recover its cost. For example, tractors, work vehicles and tools can all be depreciated on your tax return. If you purchase supplies for the business, these items can all be deducted in the year in which you paid for them.
Other Significant Costs
You may also incur many other costs that are tax deductible when running a tree farm. For instance, if you pay interest on a business loan or line of credit, the Internal Revenue Service allows you to deduct that amount when you file your taxes. Other costs such as appraisal costs, surveys and marking trees can also be deducted from your taxable income. If you drive a work vehicle, you may also deduct for each mile you drive. When you travel for business-related purposes, these costs can also be deducted.