Christmas tree growers are often eligible for a tax deduction for trees damaged or destroyed due to natural disasters. However, the tax deduction is limited to the adjusted basis of the trees, not the trees’ market value.
Are you a forest landowner wondering how to deduct timber losses due to natural disasters? If so, read this article!
I frequently receive questions from Christmas tree growers regarding tax deductions for damaged or destroyed Christmas trees, especially from natural disasters such as hurricanes, floods, and wildfires. As I’m posting this article, Hurricane Ian has caused damage throughout the Southeast and will likely damage some Christmas trees.
Fortunately, Christmas tree growers are often eligible for a tax deduction for trees damaged or destroyed due to natural disasters. However, the tax deduction is often less than expected because the deduction is limited to the adjusted basis of the trees, not the trees’ market value.
Casualty Losses in General
Property losses from natural disasters are often considered “casualty losses” by the IRS. The IRS’ formal definition of a casualty is ““the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.”
Some examples of casualty losses are fires, floods, earthquakes, hurricanes, and vandalism. All of these examples are sudden events that can damage Christmas trees. However, tree damage due to insect infestations, drought, or disease are generally not considered casualties because they tend to result in gradual damage over time.
Christmas Tree Casualty Losses
The guidance in this section will apply to most Christmas tree growers because almost all Christmas tree growers operate their farm as a business. If a Christmas tree grower operates their farm as a hobby, see the guidance in this article.
All Christmas losses due to a casualty are fully deductible on a Christmas tree grower’s tax return if the trees are totally destroyed or unable to be saved.
If the trees cannot be saved, the deductible “loss” is the adjusted basis of the Christmas trees, not their market value. This is where most Christmas tree growers make mistakes by deducting the market value of the destroyed trees rather than the adjusted basis.
The adjusted basis of a Christmas tree is typically the cost of the seedling or transplant plus any capitalized planting expenses, such as ground preparation, planting labor, and planting supplies. An accurate Christmas tree basis and inventory calculations are extremely important because it will maximize your casualty loss deduction!
Example
Paul Pine is a Christmas tree grower in South Carolina. He had 100 Christmas trees completely destroyed by Hurricane Ian in 2022. Paul has an adjusted basis of $10 per tree and the destroyed trees’ market value is $50 per tree.
What is Paul’s casualty loss deduction?
100 trees destroyed x $10 adjusted basis per tree = $1,000 casualty loss deduction
If a Christmas tree grower can salvage the destroyed trees in any way, such as cutting and selling the trees at a reduced price, he may still deduct the adjusted basis of the Christmas trees but must also report any sales proceeds as taxable income.
The deduction for the destroyed Christmas trees should also be reduced by any actual or expected insurance proceeds. If the insurance proceeds exceed the adjusted basis of the trees destroyed, a taxable gain may result.
