FLA Supports Proposal to Include Timber Business and Forestland in IRS Business Interest Expense Limitation Guidance

The Forest Landowners Association gave official comments to the Internal Revenue Service (IRS) and Treasury Department in support of proposed changes to the definition of “real property trade or business” and “real property development and redevelopment” to include timber business and forestland.

What is the Current Definition?

As part of the 2017 Tax Cuts and Jobs Act, Congress limited the ability of some businesses to deduct interest expenses. Generally, businesses with more than $25 million in average gross receipts over a three-year period are limited in the deduction amount of business interest expenses. In addition to the gross receipts test and income limitation, Section 163(j) also has several exempted trades or businesses including farming businesses and real property trades or businesses. Unfortunately, the current definition of a “farming business” only includes fruit or nut bearing trees and ornamental trees, and does not include timber operations. Additionally, the final regulations for the Limited and Deduction for Business Interest Expense explained that while the Treasury Department and IRS view “unharvested or unreserved timber” as real property, the management of timberlands was not a real property trade or business as outlined in IRS definitions, and therefore was not exempted.

What is the Current Proposal?

The Treasury Department and IRS have determined that real property development and redevelopment trades or business should be defined to include business activities that involve the preservation, maintenance, and improvement of forest-covered areas (timberland). This proposal, if passed, will define real property development as the maintenance and improvement of raw land to (among other things) cultivate, maintain or improve timberlands. Similarly, this proposal defines “real property redevelopment” as demolition, deconstruction, separation, or removal of existing buildings, landscaping, and infrastructure on a parcel of land to return the land to a raw condition or otherwise prepare the land for new development, construction, or the establishment and cultivation of new timberlands.

What Does This Mean for Forest Landowners?

These proposed changes to the definition of “real property development” would encompass FLA member operations that establish, cultivate, maintain, or improve land for the planting, growth, and harvest of timber for commercial use in lumber, pulp, and other forestry products. In addiiton, FLA members that establish and cultivate new tracts of forestland would be considered trades or businesses conducting “real property redevelopment.” Based on this reading of the proposed regulation, FLA supports the changes proposed by the Treasury Department and IRS that will allow exemptions for forest landowners.

Because the current regulations do not allow timber operations to be exempted as real property trades or business, we urge the IRS and Treasury Department to allow taxpayers to use the proposed regulations to qualify as a real property trade or business until the proposed regulations are finalized.

We thank the Treasury Department and IRS for considering the needs of forest landowners in being able to utilize the real property trade or business exception.