Customers of “choose and cut” Kansas Christmas Tree Farms are probably going to have a difficult time finding a location to cut their perfect tree in the future.
“In the past few years, Kansas Christmas tree growers have conquered dry weather, insects and poor economic conditions. Now Christmas tree growers are facing a tax issue that is causing them problems,” according to Eldon Clawson, a Christmas tree grower operating Country Christmas Trees near Wakarusa.
“Making it difficult is a 2012 state tax law change, where a farmer’s expenses are added to their state adjusted gross income. Especially hard hit are the new startup Christmas tree farms. So hard, that only one new farm has joined the Kansas Christmas Tree Growers Association (KCTGA) in the past few years,” explained Clawson, immediate past president of the KCTGA.
“At present, we seem to have less and less new Christmas tree growers since all tree growers income is taxed differently than other small businesses in Kansas,” he pointed out.
Any other crop or livestock enterprise would give “startup farmers” an opportunity for more immediate income, making a quick income flow enterprise seem more feasible for a new farm startup in Kansas than trees, Clawson related.
“Since 2012, farms in the state have been exempt from Kansas income tax on their net farm income. However, if you don’t have income for several years, like tree farmers, the new tax law makes it difficult to stay in business since they have expenses, while still paying state tax on those same expenses,” continued Clawson, also a director of the National Christmas Tree Association.
New Christmas tree growers don’t realize an income for seven or more years, because the trees grow at the rate of one-foot or less a year. It takes Christmas trees years before they are ready to sell to customers.
“So, new growers must experience expenses that become taxed for those seven or more years. All the while, they are facing environmental conditions threatening their tree crop that add to the expenses,” Clawson said from experience.
Longtime Christmas tree growers in the state face the same tax issue as new growers, but they also face another state tax issue due to the way Christmas trees are taxed at the federal level.
“Christmas tree growers report their income from selling trees as capital gains on their federal tax returns, since Christmas trees come under the Federal Timber Tax Law. Therefore, income from Christmas tree sales is included in the federal adjusted gross income, and becomes the basis for state adjusted gross income,” Clawson stated.
Most expenses of a Christmas tree farm are reported on Schedule F of Farm Income, he said. Therefore, since income is reported as capital gains, Schedule F shows a loss approximately equal to the farm’s operating expense.
“Since the tax law change of 2012, this loss is disallowed and added back into the state adjusted gross income. Consequently, the farm must pay income tax on all of their income claimed as capital gains as well as most of their operating expense in growing trees and purchasing equipment,” Clawson explained.
“In other words, this results in paying state income tax on the majority of gross sales of trees grown and cut in any one year, and then also in each additional year,” Clawson clarified.
“It will become more and more difficult to find ‘choose and cut’ Christmas tree farms in our state with the present state taxing system for Christmas trees. Since only one new farm has been started in Kansas in the past several years, customers might then turn to established growers to choose a tree,” Clawson predicted.
“They will find, however, a majority of those longtime growers are facing retirement and getting out of the tree business for that reason. This will leave no place for those choosing the perfect Christmas tree. And, just as important, no farm to experience the harvesting of a beautiful Kansas grown Christmas tree,” said Clawson, who can be contacted at Country Christmas Trees, Wakarusa, 785-207-5135.
He’s on Facebook, and his website is www.cctrees.us.