Individual Income Insights: Christmas Tree, O Christmas Tree, How Lovely Are Your Tax Breaks?

Christmas Tree

Now that Thanksgiving is behind us, those who celebrate Christmas may (officially) start decorating for the holiday, especially with the most quintessential decoration of them all: the Christmas tree. Each year, sales of real Christmas trees in the U.S. total between 25 and 30 million trees, with U.S. farms currently growing roughly 350 million, according to the National Christmas Tree Association. Christmas tree farming is a unique business in that consumers only buy them once a year, but it takes about six years to grow them to a sellable size. With Christmas trees on the mind, let’s take a look at the tax treatment related to the sale and production of Christmas trees, as farmers of these lovable overgrown shrubs may be eligible for some presents both at the federal and state level.

Capital Gains Treatment

Christmas tree farmers under federal law are eligible for capital gains treatment on income earned from the sale or exchange of Christmas trees, as long as they meet certain requirements. Every state which imposes an income tax conforms to this federal treatment outlined in Internal Revenue Code sections 631 and 1231. For tax purposes, Christmas trees qualify as timber, and thus, under certain conditions are eligible for capital gains treatment under Section 1231. The Internal Revenue Code addresses this issue directly in Section 631, which states “‘timber’ includes evergreen trees which are more than six years old … and are sold for ornamental purposes,” covering your typical Christmas tree.

Generally, to qualify for capital gains treatment the taxpayer must be the owner of the rights to the trees, hold the rights for at least one year, and must make a sale. The sale can be either of an already cut Christmas tree or of the right to cut a tree from its stump. So whether you chop down your own Christmas tree directly at the farm or prefer to pick one out at a pop-up shop closer to your home, either way the tree farmer is likely entitled to capital gains treatment from the sale of the tree.

Interestingly, Kansas originally went a step further and allowed Christmas tree sellers to subtract from gross income any gains from the sale of Christmas trees grown in-state and held by a taxpayer for at least six years. However, with the passage of S.B. 30, beginning Jan. 1, 2017, Kansas no longer offers this benefit.

Credit Treatment

While income from the sale of Christmas trees may be eligible for favorable capital gains treatment, Christmas tree farmers don’t fare so well when it comes to certain tax credits. Some states offer reforestation tax credits, which apply to taxpayers who plant trees and can cover up to 50 percent of reforestation costs. However, these credits are typically withheld from taxpayers who plant Christmas trees. For example, Oregon and Mississippi offer reforestation credits, but under their laws “Christmas” or “ornamental” trees are expressly prohibited from qualifying for the credit.

While Christmas tree farmers may be excluded from some tax benefits, they are always entitled to the benefit of being an essential part of the holiday season.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should states provide more tax benefits for producers of Christmas trees?

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