This article analyzes in-depth just how much an “average” Christmas tree grower would save by making a capital gain election.
Looking for a video that explains this content? Check out my course “The #1 Way Christmas Tree Growers Save Taxes.”
Making an IRC § 631 Capital Gain Election Leads to Significant Tax Savings
According to my analysis, an “average” Christmas tree grower would save $27,782 in taxes each year by making a capital gain election! This is “free” money from the US government that most Christmas tree growers overlook.
What could a Christmas tree grower do with an additional $27,782 each year? Here are some ideas:
- Expand farm (acquire more land, plant more seedlings, etc.)
- Save for retirement
- Pay off debt
- Fund children/grandchildren’s education
- Buy new farm equipment
- Advertise and reach more potential customers
- Take more time away from the farm by hiring another employee
- Hire an accountant to do taxes and/or bookkeeping
- Travel more (for vacation, or even for Christmas tree association meetings!)
The tax savings from a capital gain election can drastically improve a Christmas tree grower’s life.
The following section explains how I calculated the “average” tax savings of $27,782 and how to compare my analysis to your farm.
Analysis and Assumptions
2020 Christmas Tree Production Budget
My income and expense estimates are based on the 2020 Christmas Tree Production Budget created by Bill Cackler of Cackler Farms in Delaware, Ohio. Bill and his wife Donna own a great Christmas tree farm, and I first met Bill at an Ohio Christmas Tree Association meeting back in 2016.
Bill’s 2020 Christmas Tree Production Budget example spreadsheet, along with my assumptions, are available for download at the end of this article for you to compare to your own farm and to help you budget for future years.
My “Average” Choose-and-Cut Farm
Christmas tree farms come in many different shapes and sizes. However, for my “average” choose-and-cut farm, I assumed a farm of 40 planted acres with sales of 5,000 trees per year (with an average sale price of $63/tree).
There are many growers who sell less than 5,000 trees per year, while there are also many growers who sell more than 5,000 trees per year. Further, selling prices for Christmas trees can vary widely. My “average” is simply meant to be an example.
With my assumptions of 40 planted acres and sales of 5,000 trees per year, I entered my numbers into the 2020 Christmas Tree Production Budget and made some of my own tax adjustments. I ended up with a projected total net income of $229,370 for my example farm:
Tax Savings from an IRC § 631 Election
An “average” grower who prepares their taxes according to the ordinary method would pay a staggering $46,715 in federal income taxes, while the exact same grower who makes an IRC § 631 election would pay only $18,933 in federal income taxes, a savings of $27,782:
What is even more astonishing is that this “average” grower will continue to save $27,782 EACH YEAR for the rest of their life as a Christmas tree grower!
Additional Analysis
Please note my “average” grower’s only source of income is his Christmas tree farm. A grower who has other sources of income (wages, social security, interest, etc.) and other deductions (charitable deductions, etc.) may save more or less tax than my hypothetical farmer. Further, filing status (married filing joint, single, etc.) will also affect tax savings.
Also, selling prices for trees and how well a grower manages expenses will change the overall tax savings. The 2020 Christmas Tree Production Budget is based on Bill’s experience as a Christmas tree grower in Ohio. Market prices for trees and costs to grow trees vary widely across the country and will need to be adjusted for your specific situation.
My hypothetical grower is a choose-and-cut grower. Wholesale growers may also elect capital gain treatment and save significant tax dollars, but the tax savings may differ from my example.
A grower who sells less trees will also save less total tax dollars than my hypothetical farmer who sold 5,000 trees. However, the overarching principle remains the same—the best way for a Christmas tree grower to save tax dollars is to elect capital gain treatment.
Despite the differences among Christmas tree growers, even if you only save a fraction of the projected savings of $27,782, that is still hundreds or thousands of extra dollars in your pocket year after year.
IRC § 631 Overview
[This is an excerpt from my full article analyzing IRC § 631]
Growers can elect under IRC § 631 to have income from the sale of cut Christmas trees taxed as capital gains rather than ordinary income. Growers prefer long-term capital gain income because it is taxed at lower rates and is not subject to employment taxes. Electing capital gain treatment often results in substantial tax savings for the typical Christmas tree grower.
Christmas tree sales qualify as capital gain income as long as they are “timber.” Sales of cut Christmas trees are “timber,” according to the IRC, if they meet all of the following four requirements:
- Evergreen trees
- More than six years old
- Severed at the roots
- Sold for ornamental purposes
Most average-sized Christmas trees sold by a grower will qualify as the age of the seedling or transplant counts towards the age of the tree for purposes of being “more than six years old.” Trees six years old or less, potted trees, and balled & burlapped trees will not qualify for capital gain treatment.
Trees sold wholesale, pre-cut, and choose-and-cut will qualify if they meet the four requirements above and the grower has owned the trees (or had the right to cut the trees) for more than one year.
Making an IRC § 631 Election
An IRC § 631 election is an extremely powerful tool that every Christmas tree grower should consider. However, many accountants and CPAs are not aware of this tax advantage for Christmas tree growers and how to properly claim it on the tax return.
An election must be made on the tax return, income must be properly allocated between ordinary and capital gain, and Form T must be filed with a grower’s tax return to properly make a capital gain election. Further, a grower’s recordkeeping must track the necessary requirements to be eligible for capital gain treatment under IRC § 631.
Conclusion
Every Christmas tree grower should consider an IRC § 631 election to minimize their taxes. It is best to consult with a knowledgeable CPA or tax professional to determine how to properly implement a capital gain election in your individual situation. Every grower’s tax situation is different, so the analysis shared above might not be the best way to prepare your taxes.
Free Downloads & Extras
To download a copy of Bill’s 2020 Christmas Tree Production Budget spreadsheet, view my assumptions for the above analysis, or to have me calculate how much you could save by making an IRC § 631 election, please complete the following form:
