A Christmas tree grower should not deduct Christmas tree seedlings and planting costs in the year of planting. Rather, Christmas tree seedlings and planting costs should be capitalized and deducted when the trees are eventually sold.
As most Christmas tree growers are currently in the midst of planting season or just finishing up, I decided to write this article as a helpful reminder of how to deduct Christmas tree planting costs.
Common Mistake
A common mistake I see Christmas tree growers make is deducting the cost of the Christmas tree seedlings/transplants, planting expenses (land preparation, root dip, etc), and planting labor in the year the trees are planted. Immediately deducting planting costs is incorrect because Christmas trees are inventory to a Christmas tree grower.
Correct Treatment of Christmas Tree Planting Costs
Instead, a Christmas tree grower should “capitalize” seedling and planting costs. Costs are capitalized by combining the costs in a separate recordkeeping asset account and deducting the costs as a Cost of Goods Sold (if the capital gain method is not being used) deduction in the year the trees are sold.
If a grower elects capital gain treatment on the sale of cut Christmas trees (which will save most Christmas tree growers thousands of dollars), the seedling and planting costs are deductible as a “depletion” deduction.
Depletion is very similar to a Cost of Goods Sold deduction, but is only used when referring to natural resources, such as timber, oil, or mining. Since Christmas trees are considered timber under Internal Revenue Code § 631 if certain requirements are met, depletion is used.
How to Fix Prior Year Errors
If a grower has treated planting costs incorrectly for multiple years, a Change in Accounting Method (Form 3115) may need to be filed with the IRS to switch to the correct method. This often requires a grower to add back any incorrectly-deducted amounts to income and deduct the costs correctly in the future.
Learn More in the Capital Gain Method Masterclass
Want to learn more about correctly deducting Christmas tree planting expenses? Check out my Capital Gain Method Masterclass, which has example recordkeeping spreadsheets, case studies, more about Form 3115, and an in-depth analysis of the applicable tax law.
