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Icy Tax Issues

Posted Mar. 1, 2001

Everyone who has been wishing for a cold winter to kill the ticks and grasshoppers should be happy. With December 2000 capturing the title of the second-coldest December on record, the winter of 2000-2001 should qualify as cold. It will be interesting to see how many ticks and grasshoppers we have next summer.

I dislike cold winters, especially wet ones. Long underwear - or longhandles, as we Okies call them feels pretty good to me till about July 4 each year. I hope that we will have fewer grasshoppers next summer because they were so thick at my place last summer, the ground seemed to move. It would be nice to be done with mass populations of armyworms and grasshoppers for a few years. Although the jury is still out on the cold winter's impact on future insect populations, the results of Old Man Winter's ice storm are evident.

Many urban and rural residents have constant reminders of what rainfall and below-freezing temperatures can do to trees and shrubs. Many trees in south central and southeastern Oklahoma and northeastern Texas were damaged considerably because of ice accumulation on the limbs. Some of you pecan producers have asked whether you can deduct a loss on your tax return. First, you need to determine whether the trees have a tax basis, and there are two ways they can qualify. The first way is for you to have bought land with pecan trees producing or capable of producing pecans and to have allocated a portion of the purchase price to them. The trees receiving a value should be individually numbered so you can determine the total number of trees. The second way is to purchase and plant a pecan tree and grow it to a nut-bearing stage. The cost of the tree at planting and all the expenses incurred until nut production are capitalized or added together and not deducted annually. The sum total of the preproduction expenses becomes the tax basis when production begins. Once production begins on trees you planted or, for mature existing trees, on land you purchased, you can deduct depreciation that year and subsequent years. Since 1986, pecan trees can be completely depreciated in ten years. If the trees are completely depreciated, they have a zero tax basis, and you cannot claim a loss.

Assuming a tree does have a tax basis and did receive damage from ice accumulation, you can claim a loss, but it is limited to the smaller of the adjusted tax basis or the decrease in fair market value. If a pecan tree that has a tax basis is damaged so much that it has no salvage value, then the amount of loss is the adjusted tax basis. If the damaged tree is salvageable, you must determine a predamage fair market value as well as a postdamage value to verify which is the smaller loss, the adjusted tax basis or the decrease in fair market value.

If you own a house in town and purchased a landscape tree, not necessarily a pecan tree, that was damaged during the storm, you can complete a casualty loss tax form even though the tree is not considered business property. There are more limitations, such as the $100 and 10 percent rules. The procedure for deducting casualty losses for nonbusiness property is more complex, and the reward is often less than expected. However, a casualty loss may be available for those who persevere. If you think you can qualify for a casualty loss, contact your tax preparer early.

I have mentioned only the highlights in this article. There are many more details your tax preparer will want to discuss with you concerning your potential casualty loss.