The Hidden Entitlements

9. Timber, agriculture, minerals

Timber, agriculture and mineral extraction have long been favored by the tax code over other industries. Besides the capital gains breaks that apply to these industries (loopholes that the Republican "Contract"tried to expand), these tax expenditures include:

Exploration and development costs. As is true for fuel minerals,certain capital outlays associated with exploration and development of non-fuel minerals may be written off immediately rather than depreciated over the life of the asset.

Percentage depletion. Most non-fuel mineral extractors also make use of percentage depletion rather than cost depletion, with percentage depletion rates ranging from 22% for sulphur down to 5% for sand and gravel.

Mining reclamation reserves. Taxpayers are allowed to establish reserves to cover certain costs of mine reclamation and of closing solid waste disposal properties. Net increases in reserves may be taken as a deduction against taxable income.

Expensing multi-period timber growing costs. Generally, costs must be capitalized when goods are produced for inventory. Timber production,however, was specifically exempted from these multi-period cost capitalization rules, allowing immediate deductions and therefore deferral of tax.

Credit and seven-year amortization for reforestation. A special 10%tax credit is allowed for up to $10,000 invested annually in clearing land and planting trees for the production of timber. The same amount of forestation investment may also be amortized over a seven-year period. Without this preference, the amount would have to be capitalized and could be deducted only when the trees were sold or harvested (say, 20 or more years later.)Moreover, the forestation investment that is amortizable is not reduced by any of the investment credit that is allowed.

Expensing certain capital outlays. Farmers, except for certain agricultural corporations and partnerships, are allowed to deduct certain investments in feed and fertilizer, as well as for soil and water conservation measures.Expensing is allowed, even though these expenditures are for inventories held beyond the end of the year or for capital improvements that would otherwise be capitalized.

Expensing multi-period livestock and crop production costs. Raising livestock and growing crops with a production period of less than two years are exempted from normal cost capitalization rules. Farmers planting orchards,building farm facilities for their own use or producing goods for sale with longer production periods also may elect not to capitalize certain costs.But if they do, they must apply straight-line depreciation to all depreciable property they use in farming.

Loans forgiven solvent farmers. Farmers are granted another special tax treatment --exemption from taxes on certain forgiven debt. Normally,loan forgiveness is treated as income of the borrower. The borrower must either report the income right away or reduce his recoverable basis in the property to which the loan relates (leading to reduced depreciation deductions or a larger taxable gain when the property is sold). In the case of bankrupt debtors, however, loan forgiveness does not result in any income tax liability(currently or in the future). Farmers with forgiven debt are treated as"bankrupt" for tax purposes (even though they are solvent), and thus are never taxed on their forgiven loans.


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