ity) for the tax year; 



(3) The individual participates in the activity for more than 

 100 hours during the taxable year, and such individual's 

 participation in the activity for the taxable year is not 

 less than the participation in the activity of any other 

 individual (including individuals who are not owners 

 of interests in the activity) for such year; 



(4) The activity is a significant participation activity for 

 the taxable year, and the individual's aggregate par- 

 ticipation in all significant participation activities dur- 

 ing such year exceeds 500 hours; 



(5) The individual materially participated in the activity 

 (determined without regard to this test) for any five 

 taxable years (whether or not consecutive) during the 

 ten taxable years that immediately precede the taxable 

 year; 



(6) The activity is a personal service activity and the mdi- 

 vidual materially participated in the activity for any 

 three taxable years (whether or not consecutive) pre- 

 ceding the taxable year (Note: this is a lifetime test, it 

 does not apply to farming); or 



(7) Based on all of the facts and circumstances, the indi- 

 vidual participates in the activity on a regular, con- 

 tinuous, and substantial basis during the year and for 

 at least 100 hours. 



If you pass this test, any losses from the fanning business 

 are not limited by passive activity loss rules. [Treas. Reg. 

 §1.469-5T(a)] (Note: If taxpayer is the surviving spouse of 

 a retired farmer the provisions of Treas. Reg. §1.469- 

 5T(h)(2) should be consulted.) 



Treatment of Reforestation Costs 



Certain reforestation expenses on land held for the com- 

 mercial production of timber qualify for investment tax 

 credit and amortization over seven years. Christinas tree 

 production does not qualify. The limit is $10,000 per year 

 on a joint return and $5,000 per year on a single return. 

 Expenditures must be for site preparation and planting or 

 seeding, including materials, labor, and share of deprecia- 

 tion of equipment. Expenditures for which the taxpayer has 

 been reimbursed under a government cost-sharing program 

 must be excluded unless the government payments are also 

 included in gross income. Most government cost-sharing 

 payments may be excluded from taxable income; however, 

 payments under the Conservation Reserve Program must 

 be included in taxable income. [IRS Publication 535] 



Example Woody Forest spent $5,000 on fuel, labor, 

 seedlings, and depreciation to reforest 50 acres. He was ap- 

 proved for cost sharing by ASCS and received 65% of his 

 expenses or $3250. This amount showed on the CCC- 1 099- 

 G provided to Woody by the ASCS. Woody can exclude 

 from income the greater of the present value of ( 1 ) the right 

 to receive $2.50 per acre, or (2) the right to receive 10% of 



the average income from the land for the previous three 

 years. [Treas. Reg. 16A.126-l(a)]. Since Woody had no 

 income from the land he used (1) and used 8% as the ap- 

 propriate interest rate in the present value calculation. The 

 value is then $2.50 ^ 0.08 = $31.25 per acre or $1562 for 

 the 50 acres. Therefore, he figures 



Government payment $3250 



Less excludable amount 1562 



Amount included in income 1688 



(Schedule F or C) 

 /l^ic/ Woody 's share of costs 



($5,000-$3250) 1750 



Total (enter on Form 3468, line 3) $3438 



Line 3 of Form 3468 instructs Woody to take 10% or $344 

 as the amount of investment tax credit. The basis for amor- 

 tization must be reduced by half of the investment tax credit 

 or $172 ('/2X $344 = $172). 



Total eligible expenses $3438 



Less half of investment tax credit 172 



Amortization basis $3266 



Amortization must be taken over seven years using the half- 

 year convention. $3266 -^ 1 - $467 giving 



Year 1 $232 



Years 2 through 7 $467 



Year 8 $232 



The amortization amount is entered on Form 4562 line 39 

 or 40 and then transferred to ScheduleF line 34 or Sched- 

 ule C line 27a or write "Reforestation Amortization. See 

 attachment." on Form 1040 line 30 and enter the amount 

 on line 30. 



The stewardship incentive program (SIP) has been 

 determined to be substantially similar to the type of con- 

 servation, restoration and reclamation programs described 

 in l.R.C. § 1 26(a)( 1 ) through (8) so that § 126 improvements 

 made in connection with small watersheds under SIP can 

 be treated in the way described above. The cost-sharing 

 payments are excludable from gross income. [Rev. Ruling 

 94-27] 



Footnotes 



Explanation of abbreviations in citations: [l.R.C. §], 

 Internal Revenue Code section number; [LTR], Internal 

 Revenue Service letter ruling; [Rev. Proc], IRS Revenue 

 Procedure; [Rev. Ruling], IRS Revenue Ruling; [TCM or 

 TC. Memo], Tax Court Memorandum; [Treas. Reg] IRS 

 temporary or final regulations. 



Far their helpful comments, and without implicating 

 them in any way, I thank Robert Christensen, Department 

 of Resource Economics and Michael Whiteman. Depart- 

 ment of Accounting and Information Systems, both of the 

 University of Massachusetts, and Earl Bean, CPA, Rev- 

 enue Agent, Internal Revenue Service. 



Fruit Notes, Winter, 1995 



23 



