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Larry Gearhardt, Asst. Professor, OSU Extension

Much of Ohio’s forestland has been plagued by, first, the emerald ash borer, and more recently, the Asian longhorn beetle. Can you deduct the loss on your tax form when a major portion of your forest land is destroyed by these insects? You can if the timber or forest land is held to produce income. If the timber is held merely for personal use, the loss is not deductible. A tax deduction is available to owners who hold timber or forest land to produce income, as opposed to personal use.  

Casualty Versus Non-Casualty Loss

Where to deduct a loss on your tax forms depends upon whether the loss is a casualty loss or a non-casualty loss. A “casualty” is defined as the damage, destruction, or loss of property from an identifiable event that is sudden, unexpected, and unusual. Disease, insect infestation, drought, or combinations of factors seldom qualify as a casualty because these types of damage tend to be gradual or progressive rather than sudden. However, Revenue Ruling 79-174 provides that a massive southern pine beetle infestation that killed residential shade trees in 5 to 10 days did qualify as a casualty. Whether or not it is a casualty depends upon the facts of the situation.  

A “non-casualty” loss is defined as the damage, destruction beyond use, or loss of property from an identifiable event. Like a casualty, the precipitating event for a non-casualty loss must be unusual and unexpected, but unlike a casualty, it does not have to be sudden. For example, insect attacks have resulted in deductible non-casualty losses of timber according to Revenue Ruling 87-59.  

Deduction of a Non-Casualty Loss

A non-casualty loss is a business deduction. With one exception, owners who hold their timber as an investment, as opposed to managing timber as a business, cannot deduct a non-casualty loss. The exception is unusual and unexpected drought.  

To calculate the amount of a non-casualty loss, the owner must first calculate the basis of the timber lost as you would for a sale. You then divide the adjusted basis in the affected block of timber by the basis of the total volume of timber in the block, updated to immediately before the loss. The result is multiplied by the volume of timber lost.  

As an example, assume that the fair market value of the timber lost was $9,000. The basis of the timber lost was $3,500. If you held the timber as part of a trade or business, you could deduct $3,500 allowable basis in the timber lost on IRS Form 4797. Start on IRS Form 4797, Part II, for timber held one year or less, or Part I for timber held more than one year. The loss will be netted with other gains and losses from the disposal of other business property. If you are holding the timber as an investment, you cannot deduct a non-casualty loss unless it was from drought.  

In contrast with casualty losses, which are deducted first from ordinary income, non-casualty losses are first deducted from capital gains. This treatment of non-casualty loss is a disadvantage, since capital gains receive more favorable tax treatment.  

Expenses

A loss frequently gives rise to related expenses, such as the cost of a cruise or appraisal to determine the extent of the loss, that cannot be included as part of the loss. Such expenses are often deductible, but where you take the deduction differs according to the type of loss.

If you hold your timber or forest land as part of a trade or business, these expenses are deducted on IRS Form 1040, Schedule C, or Schedule F if you qualify as a farmer.   If you hold your timber or forest land as an investment, an owner can deduct expenses related to a non-casualty loss to the extent that they qualify as “ordinary and necessary” expenses, even if you cannot deduct the loss itself. However, an owner holding timber as an investment will report expenses on IRS Form 1040, Schedule A, in the “Miscellaneous deductions” section. This deduction will be subject to the 2% of adjusted gross income floor.  

What If There Is a Gain?

If timber or forest land is damaged or destroyed and the owner receives payment in the form of a damage claim, salvage proceeds, insurance recovery, or other compensation, the transaction is called an involuntary conversion or involuntary exchange. If the payment that the owner receives is greater than the basis of the timber lost, there will be a gain rather than a deductible loss. Unless the owner elects to defer the gain by replacing the property within specified time limits, the gain must be reported.

For more information, see the USDA Forest Landowners' Guide to the Federal Income Tax here.  

A claim that the Ohio Department of Agriculture’s (ODA) anhydrous ammonia regulations are unreasonable and fail to protect public health and safety has again been rejected by the courts.  A recent decision by Ohio’s Fifth District Court of Appeals concluded that the challenge by Sharon Township’s Board of Trustees in Medina County failed to establish a valid legal claim.

The case raised considerable controversy in Sharon Township, where the owner of South Spring Farms requested ODA approval to install a 12,000 gallon anhydrous ammonia storage tank.   Ohio law grants ODA the authority to adopt rules concerning the handling and storage of anhydrous ammonia and other fertilizers and also prohibits any local regulation of fertilizers.   ODA created anhydrous regulations in the late 1970s; those regulations require ODA approval of the location and design of a stationary ammonia system.

ODA approved South Spring Farms’ application in 2010 and granted a permit for installation of the tanks.  Sharon Township filed a lawsuit against ODA, asking the trial court to grant an injunction prohibiting the ODA from permitting the installation of anhydrous storage tanks “until the ODA established regulations which would reasonably protect the health, safety, and welfare of people and property which can be reasonably foreseen to be exposed to the toxic and deadly effect of an uncontrolled release of this dangerous material, anhydrous ammonia.”

The legal basis for the denial of Sharon Township’s request for an injunction by both the trial and appeals courts concerns the issue of whether there is a “real and substantial controversy” that necessitates injunctive relief by the court, rather than “an opinion advising what the law would be upon a hypothetical state of facts.”  The Court of Appeals could not find any support for Sharon Township’s claim that the ODA regulations are unreasonable or fail to protect public health and safety.  Without such support, the court concluded that there was no controversy it could resolve.  Granting the township’s request for an injunction would thus amount to “judicial legislation,” said the court.

The case is one that raises questions about the relationships between agriculture and its surrounding communities.  Are communities becoming less willing to tolerate agricultural activities, even though Ohio laws are often set up to support and encourage agriculture?

The use of anhydrous ammonia is a routine practice farmers have engaged in for several decades, yet it upset a surprising number of local leaders and residents in this instance.  The large size of the tank may have been a factor, as well as the extent of non-farm residents in the area.  In addition to the possibility of a leak or spill, concerns raised by the community included proximity to many residents, fear of tampering by methamphetamine producers, an earlier chemical spill by the farm and lack of requirements for fencing.  Whether these are real or perceived threats, the fact that they were raised so strongly and taken to the court of appeals gives us cause for concern.

The case is Bd. of Twp. Trustees Sharon Twp. v. Zehringer, 2011-Ohio-6885 (Dec. 28, 2011).

Do you need a CDL for your farm operations?

Like many other areas of law, driver’s license regulations for agricultural situations have unique provisions and exemptions.  Recent rumors had the agricultural community concerned about possible changes in the Commercial Driver’s License (CDL) requirements for agriculture.   While the U.S. Department of Transportation has clarified that CDL provisions for agriculture will not change at the federal level, the rumors had many asking questions about when an agricultural operator needs a CDL.

Federal Authority over CDLs

The Federal Commercial Motor Vehicle Safety Act (FCMVSA) addresses driver’s licensing for commercial vehicle operators, and aims to protect public safety by establishing qualifications for those who drive large trucks and buses on public roads and highways.  The federal law delegates the actual authority over CDL licensing to each individual state, but first establishes minimum federal standards that a state must meet when issuing CDLs.  In regards to agriculture, the law specifically allows a state to create CDL exemptions for “operators of a farm vehicle which is controlled and operated by a farmer, including operation by employees or family members.”    The recent statement from the federal government about CDLs clarified that there would not be any new minimum federal standards for agriculture or any changes to the federal delegation of agricultural exemption authority to the states.  Therefore, an agricultural operator must look to the CDL laws of the state in which he or she operates.

Ohio’s CDL Exemption for Agriculture

Ohio law establishes a “farm truck operator exemption” in Ohio Revised Code 4506.03(B)(1).  This provision states that Ohio’s CDL requirements do not apply “to any qualified person when engaged in the operation of a farm truck.”   The farm truck exemption is designed to address the situation where a farmer trucks goods back and forth from the farm, but not for long distances.  Important to the exemption is the definition of “farm truck,” which is:

• A truck controlled and operated by a farmer that is used to transport:
  • Products of the farm either to or from the farm, for a distance of not more than 150 miles, including livestock, livestock products, poultry, poultry products and floricultural and horticultural products,
  • Supplies to the farm, from a distance of not more than 150 miles, including tile, fence, and every other thing or commodity used in agricultural, floricultural,horticultural, livestock, and poultry production, and livestock, poultry, and other animals and things used for breeding, feeding, or other purposes connected with the operation of the farm,
  • As long as the truck is not used in the operation of a motor transportation company or a private motor carrier.  ORC 4506.01(O).

Note that the farm truck exemption refers specifically to a truck controlled and operated by a “farmer.” The law does not provide a definition for “farmer,” however.  This raises questions about who the law covers:  are farm family members and employees included? To date, there are not any published court opinions that lend clarity to the issue.  Farm operators should be aware that a citation could be possible if an officer believes a truck operator is not a “farmer.”

The Restricted CDL for Farm-Related Service Industries

Ohio law also provides a restricted CDL for operators who service the agricultural sector on a seasonal basis.  The restricted CDL applies to eligible “seasonal” operators, which includes farm retail outlets and suppliers, agri-chemical businesses, custom harvesters and livestock feeders.  The law waives the requirements for CDL written and skills tests for eligible seasonal operators.  The seasonal operator my operate a Class B or Class C vehicle, subject to restrictions:  travel must be within 150 miles of the place of business, the seasonal period must be no more than 180 days in any twelve month period, and hazardous material transport is  limited to 1,000 gallons of diesel fuel; 3,000 gallons for liquid fertilizer; and solid fertilizer only if without accompanying organic substances.  To receive a restricted CDL for farm-related service, the operator must file an application and meet eligibility requirements, such as one year of driving experience, no motor vehicle violations or offenses and no license suspensions, revocations or cancellations.  ORC 4506.24.

Ohio’s CDL Laws and Other States

Ohio’s CDL provisions for agriculture are valid only within the State of Ohio.  The federal government allows a state to make reciprocal agreements for CDL licensing with other states, but no such agreements regarding agriculture exists between Ohio and another state.   Without a reciprocal agreement on agricultural exemptions, an operator who crosses state lines is engaging in "interstate" travel, which requires a CDL and raises additional federal requirements.

For information on Ohio’s CDL laws, visit the Ohio Department of Public Safety.