Generally speaking, a retired or disabled timber 
owner will be treated as satisfying the material par- 
ticipation requirement if he or she satisfied it for at 
least 5 of the 8 years immediately preceding the 
date social security retirement benefits began, or 
that the owner became disabled, whichever hap- 
pened earlier. Also, if a surviving spouse acquires a 
timber property from the deceased spouse, he or 
she thereafter need only satisfy an "active manage- 
ment" requirement, which is less stringent than ma- 
terial participation. Active management means mak- 
ing broad business-management decisions rather 
than periodic operating decisions. 
Although the regulations have not yet been writ- 
ten by the Internal Revenue Service, in most cases, 
those timber owners who follow sound manage- 
ment practices and who utilize good technical 
advice should be able to avoid being trapped by the 
passive loss rules. 
Reforestation Amortization and Credit 
Although it has been proposed from time to time 
that the Federal income tax law be amended to 
authorize the expensing of reforestation costs in 
order to encourage tree farming, no such provision 
has to date been enacted. However, a compromise 
was reached in 1980. The Internal Revenue Code 
was amended in that year to provide an exception 
to the general capitalization rules described above. 
Taxpayers may elect to amortize over 8 tax years the 
first $10,000 of reforestation expenditures incurred 
each year. One-fourteenth is deductible the first 
year, one-seventh in each of the next 6 years, and 
the remaining one-fourteenth in the eighth year. In 
addition, a tax credit is allowed equal to 10 percent 
of the first $10,000 of such costs paid annually. 
Reforestation expenses in excess of the annual 
$10,000 ceiling must continue to be capitalized and 
recovered as before. This provision was not 
changed by the 1986 tax law. 
108 
Impacts of the Federal Income Tax 
on Southern Forestry 
Rigorous evidence is lacking as to the specific 
cause-and-effect relationship of the special Federal 
timber income tax provisions to improved forest in- 
vestment and productivity in the South. However, a 
1985-86 Society of American Foresters task force 
on Federal forest taxation (Society of American 
Foresters 1986) concluded that the equitable Fed- 
eral tax treatment enjoyed until 1987 by woodland 
owners, and to some extent even now, paralleled 
significant and distinctly improved forest resource 
trends in the Southern States realized through the 
application of scientific forestry practices. The task 
force also reported that a large number of indepen- 
dent and respected economists who are recog- 
nized as authorities on the workings of the forest 
economy--and who have long studied the relation- 
ship of public support mechanisms to the improve- 
ment of private forestry practices--agreed that the 
special Federal timber income tax provisions have 
provided a favorable climate and contributed signifi- 
cantly to private forest productivity in the South. 
State Income Tax 
In addition to the Federal tax treatment of timber 
income, most southern woodland owners are also 
concerned with State income tax provisions that 
affect returns on forestry investments. State income 
tax laws in the South may be divided into three 
broad categories (McGee and others 1982) in terms 
of effect on timber revenues (table 4). In the South, 
five States use Federal adjusted gross income as 
the basis for computing taxable income; four com- 
pute their own adjusted gross income for this pur- 
pose. Florida, Tennessee, and Texas have no State 
income tax. 
