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compute net present values of tax incentives; only 

 year-by-year changes in tax liabilities were 

 calculated. 



Shabman (36) estimated tax savings of about 30 per- 

 cent on conversion of Mississippi bottomland hard- 

 woods. Reductions of 44 percent in annual cash 

 flow requirements were estimated for a hypothetical 

 operator in the 30-percent tax bracket. Since these 

 calculations were based on tax law before the Tax 

 Reform Act of 1981, they are probably conservative 

 compared to treatment of property now handled 

 under the accelerated cost recovery system. 



According to an Internal Revenue Service (IRS) 

 sample of 1982 returns, 2.5 percent of Schedule F 

 filers claimed land clearing deductions averaging 

 $1,060, and 3.9 percent claimed soil and water con- 

 servation expenses averaging $1,065. It is not 

 known how much of these amounts were for clear- 

 ing and draining wetlands. More than half (53.5 per- 

 cent) of the deductions were claimed by low-tax- 

 bracket operators with less than $11,900 of taxable 

 income. Only 5.1 percent of the deductions were 

 claimed by operators with more than $500,000 of 

 farm business receipts. Even less is known of non- 

 farm taxpayers who might become involved in 

 wetland conversion for farming. In 1982 about one- 

 third of total deductions for land clearing and for 

 soil and water conservation was claimed by 

 Schedule F filers with more than $50,000 of off- 

 farm income. 



Tax reform may eliminate some tax breaks for land 

 conversion. A tax reform bill passed by the House 

 Ways and Means Committee in late 1985 repealed 

 deductions for land clearing expenditures, tightened 

 eligibility for soil and water conservation deduc- 

 tions, and denied exclusion of capital gains from 

 sales of converted wetland (6). However, these 

 changes may not be included in final tax reform 

 legislation. 



Conversion Potential of Private Palustrine 

 Wetlands 



We derived estimated crop yields on privately 

 owned palustrine wetlands identified in the 1982 

 NRI by linking Soil Conservation Service (SCS) soil 

 interpretations with the NRI wetland points (49). 

 SCS collects and analyzes data from research plots, 

 field trials, and farmer's fields for use in soil inter- 

 pretations. Estimated yields are established for 

 benchmark soils based on review of yield data from 

 all available sources, and are reviewed by all States 

 in which the soil occurs. SCS records predicted 

 crop yields approximating those obtained by 



Income Taxes and Agricultural Land Use 



Farmers who convert land for farming can reduce 

 their income tax liability through deductions, 

 credits, and capital gains. Some of these are 

 limited to maximum amounts or percentages of in- 

 come and also are subject to other restrictions. 

 Specific provisions are: 



• Deduction of land clearing costs up to $5,000 

 or 25 percent of net farm income (Section 182 

 of the Internal Revenue Code); 



• Deduction of drainage and land shaping, con- 

 strued as soil and water conservation 

 activities, up to 25 percent of gross farm in- 

 come, with amounts that exceed this limit in 1 

 year carried forward (Section 175); 



• Deduction of depreciation under the ac- 

 celerated cost recovery system (Section 168); 



• Deduction of interest payments on debt 

 Hnancing of clearing and drainage (Section 

 163); 



• Investment tax credit equal to 10 percent of 

 depreciable investments associated with clear- 

 ing and drainage (Section 46); 



• Exclusion of 60 percent of long-term capital 

 gains from sale of improved farmland 

 (Section 1202). 



Deductions for land clearing and for soil and 

 water conservation reduce taxes in the current 

 year in lieu of capitalizing those expenses, which 

 would increase the taxable basis of the improved 

 land. This deduction also has the effect of increas- 

 ing the amount of long-term capital gain that will 

 be realized on sale of the property; long-term 

 capital gains are taxed at a lower rate than or- 

 dinary income. Land clearing deductions cannot 

 be claimed after the land is in production, and soil 

 and water conservation deductions cannot be 

 claimed for land that is not used for farming. In 

 fact, the interpretation of these deductions is suffi- 

 ciently broad that almost any activity that involves 

 clearing vegetation, moving earth, or ditching can 

 qualify for either one or the other section 

 (55, Chapter 6). 



The investment tax credit effectively reduces the 

 cost of qualifying investments by one-tenth, if tax 

 liabilities are higher than the credit allowed. 

 Accelerated cost recovery allows the investment to 

 be written off faster, increasing after-tax income 

 in earlier years over true economic depreciation. 

 Deducting interest effectively reduces the cost of 

 financing land conversion investments by a 

 percentage equal to the marginal tax rate, which 

 can be as high as 50 percent. 



