You report the sale expenses on the new Form 8949 and Form 1040 Schedule D. It is prudent to file Form T (see page 25). Timber sale expenses are fully deductible from the sale proceeds. If your timber holding is an investment, report timber sale expenses on the new Form 8949 and Form 1040 Schedule D (see page 7).
- (If you are in the business of selling Timber, you will report this income and related expenses as self-employment income on Schedule C) To enter this as a capital asset sale in TurboTax, log into your tax return and type “investment income (gains and losses)” in the search bar then select “jump to investment income (gains and losses)”.
Is the sale of timber taxable?
When you sell timber, your revenue will either be taxed as Ordinary Income or Capital Gains. The tax rate for ordinary income is higher than capital gains tax rates. Your tax advisor can help you determine these payments. The landowner’s best tax advantage usually is through the provisions of capital gains.
How do I report a 1099-s timber sale?
How do I report the income if I am in the timber business? If you owned it for more than one year then the income should be reported on Form 4797, Part I. The total payments you received are reported in column (d). You may be able to claim in column (f) a depletion allowance for the timber sold.
What 1099 form do I use for timber sales?
Form 1099-S (Proceeds from Real Estate Transactions) is used for reporting sale (or exchange) of real estate, including standing timber sales (Sec. 1.6045-4 and Sec. 6050N).
How do I report timber sales on TurboTax?
1099-S for timber sale. Where do I report it?
- Once you are in your tax return, click on the “Federal Taxes” tab (“Personal” tab in TurboTax Home & Business)
- Next click on “Wages & Income” (“Personal Income” in TurboTax Home & Business)
- Next click on “I’ll choose what I work on”
How do I avoid capital gains tax on timber sale?
The IRS code about timber sale taxation is a bit obscure. There are three main ways to reduce the tax bill; 1) report income as capital gains, 2) calculate the timber basis and depletion, and 3) keep receipts for all out-of-pocket expenses related to the timber sale.
Are timber sales subject to self employment tax?
If you are a farmer who cuts and sells timber, include your timber income and expenses and the basis of the timber sold as farm income and expenses on Schedule F of Form 1040. Such income would be subject to self-employment tax and would be reported on Schedule SE of Form 1040.
Can timber sales be reported on Schedule F?
Deductible timber expenses are reported on Form 1040, Schedule F, if operated as a sole proprietorship. If the farmer is not holding timber primarily for sale to customers in the ordinary course of a timber business, the timber is considered a capital asset.
How do I report a 1099-s?
If the 1099-S was for the sale of business or rental property, then this is reportable on IRS Form 4797 and Schedule D: From within your TaxAct return (Online or Desktop) click on the Federal tab. On smaller devices, click in the upper left-hand corner, then select Federal.
How much is capital gains tax on timber?
Generally, the maximum long- term capital gains rate for timber is 15 percent (for taxpayers in the 10 or 15 percent ordinary income tax brackets, the maximum long-term capital gains rate is 5 percent).
Who is responsible for filing Form 1099-s?
Businesses are required to issue a 1099 form to a taxpayer (other than a corporation) who has received at least $600 or more in non-employment income during the tax year. For example, a taxpayer might receive a 1099 form if they received dividends, which are cash payments paid to investors for owning a company’s stock.
What is Form 1099-S used for?
File Form 1099-S, Proceeds From Real Estate Transactions, to report the sale or exchange of real estate.
What is timber depletion allowance?
The depletion deduction is a tax free return of how much the trees (timber), growing on your land, cost at the date you acquired the property. This purchase price includes the acreage of soil involved plus the trees and any other components of value, such as a house or water frontage that comes with the land.
Where do I report timber royalties?
In the case of timber, royalties usually are reportable as sales proceeds on Form 4797, Sales of Business Property, and may receive capital gain treatment. Therefore, reporting to payment recipients on Form 1099-S, Proceeds From Real Estate Transactions, is more appropriate in this case.
Timber Sales & Income — National Timber Tax
There are three fundamental methods in which money may be derived from the ownership of timberland: by harvesting, selling, and leasing.
- It is possible to generate money from the ownership of wood property in three different ways:
Generally speaking, the revenue from items 1 and 2 above are considered to be regular income. According to Item 3 above, your income may qualify for capital gains treatment, which means that it will be taxed at a lower rate than your regular income in this scenario. If you are unsure if your timber sale qualifies for capital gains treatment, consult with an accountant. Click Here to Learn More! It is likely that you will be asked a series of questions depending on what was sold and how you handled the transaction.
Rather than choosing to be in such a predicament, tree growers are compelled to do so by the nature of the timber growth process.
- Because of the reduction in the number of tax rates, Congress determined that income averaging was no longer essential.
- It is no longer feasible to stretch the tax burden over more than one tax year without also spreading the receipt of the income across several tax years.
- The proprietors of the timber are responsible for the payment.
- The production of lumber, on the other hand, does not qualify as farming for the purposes of this section.
- How much extra income can you expect to earn based on your predicted taxable income before you are placed in a higher tax bracket?
- In most cases, if the money from your wood investment will be used for the benefit of the entire family, it is possible to raise after-tax income by splitting the before-tax income among the members of the family.
- Considering the complexity of many of these arrangements, they should only be carried out under the supervision of qualified legal counsel.
- What would the rate of interest be on the postponed payments if they were not made?
- If this is the case, how much would it cost to borrow the funds?
- Rules for Passive Loss- The limits on passive activity losses apply to any type of business, including sole proprietorships, partnerships, estates, trusts, closely owned C-corporations, and personal service corporations, among other entities.
- For a more in-depth examination of the Passive Activity LossRestrictions, please visit this page.
After that, it is necessary to consider the tax implications of the various options. For further information on the various sorts of sales, how they are taxed for tax reasons, and how to record the revenue, please see this page.
Make sure you minimize your tax liability after sale of timber
A tax preparer who is familiar with the tax treatment of wood sales may be able to save forest owners a significant amount of money in the long term. You must pay taxes on any money you got from the sale of timber in 2011, if you received money from the sale of timber in 2011. The amount of tax you owe on that revenue will vary depending on the type of the wood sale and how diligently you adhere to the tax laws in order to reduce your tax burden as much as possible. If you do nothing, you will be subject to a higher tax rate (and maybe fines if you are found to be underreporting).
- There are forms and information available on this website, which is maintained up to date with the most recent changes in tax legislation.
- It could be worthwhile for you to seek the services of a professional tax preparation.
- The Internal Revenue Service code pertaining to wood sale taxes is a little difficult to decipher.
- Inquire as to whether or whether the proceeds from your wood sale are subject to capital gains tax rates, which are lower than ordinary income tax rates.
- Prior to selling the timber, you must have possessed it for a minimum of 12 months before it may be sold.
- With this method, you may save a significant amount of money.
- The monetary value of all of your timber at the time it was acquired serves as the foundation.
It’s not about the land.
As a result, if you harvest half of your total wood volume, you can deduct half of the base value from the profits from timber sales.
Working with a skilled forester can assist in determining the volume and worth of timber.
Deductions from gross wood sale profits are rather simple to calculate, but you will need to keep track of your receipts.
A clear deduction is available for expenses incurred in hiring a consultant forester or in setting up and administering a wood sale.
It is possible that it is advisable to make decisions with the assistance of a tax preparer who is familiar with wood sale taxation.
The same is true for the taxing portion of the agreement.
If you’re planning a timber sale in the near future, you might wish to review the current Internal Revenue Service laws before proceeding with the transaction.
Property taxes is a whole other subject.
Both need a commitment to wood harvesting as well as the development of a properly developed forest management strategy.
Before signing any agreements, make sure you are familiar with both programs.
It is only necessary to have foot access, not car access.
The Qualified Forest Property program offers a smaller tax credit, but the forest can be listed on a public land registry.
Neither of these programs is handled entirely by the Michigan Department of Natural Resources, although it does so to a significant extent.
In addition, you will require the assistance of a professional forester to assist you in developing a forest management plan. Of course, such a strategy has several advantages and is a wise decision regardless of whether you are interested in property tax reductions.
Financial Implications of Selling Timber
Selling Timber Has Financial Consequences – What You Need to Know
The Right vs. the Wrong Way
Selling Timber Has Financial Consequences – What You Should Know
- Forest owners typically refer to an outright sale as a “lump sum” deal, in which the buyer pays the owner a predetermined, lump sum price before any cutting takes place. As a result, when the trees selected for sale in the contract are chopped down, they become the property of the buyer. The amount of money paid is predetermined, and no adjustments are made between the buyer and seller if the value of the trees changes or if the wood markets fluctuate. Forest owners can benefit from this choice in terms of both tax and logistical considerations. Pay-as-cut Before any cutting takes place, the buyer and seller must agree on a unit price for the wood (e.g., $/thousand board feet, MBF, generally per species) before any cutting may take place. Part of the contract that provides the buyer the right to chop the trees that are identified in the contract is a unit price and scaling technique that are specified in the contract. The owner retains a financial stake in the trees until they are harvested and transferred to the buyer’s possession. The contract should be in writing and should assign a unit value to the wood while still retaining economic interest in the owner, transferring ownership of the tree to the buyer once it has been cut, and defining the process to be used to scale the logs and estimate the volume of the timber. Once cutting, owners can be reimbursed for the wood, with modifications made afterward based on the size of the logs after they are removed from the ground In accordance with Section 631(b) of the Internal Revenue Code, this sort of transaction will qualify for capital gains treatment. Rather of selling standing trees, a “option to regard cutting as a sale” is the sale of chopped logs instead of selling standing trees. This is frequently employed by the forest industry in conjunction with integrated operations that comprise the ownership of forest property as well as the operation of a mill. The majority of forest owners would not contemplate this method of disposal unless they were selling logs by the side of the road. If the trees were chopped and sold by the owner either roadside or to the mill, the proceeds are considered ordinary income unless a Section 631(a) election is taken to designate some of the proceeds as capital gain. The utilization of a 631(a) transaction by an owner necessitates adherence to the extensive and onerous restrictions of that part of the tax code, which can be difficult to navigate. For a variety of reasons (detailed below), the vast majority of forest owners will not gain from this sort of activity. Portion Selling– Forest owners may agree to participate in a logging operation in exchange for a percentage of the sale value. Transporting logs to a mill, where the worth of the logs is assessed after they have been chopped and by mill staff, is a common feature of this option, which is often a bad decision. Occasionally, the owner and logger will enter into a contract that grants the purchase the right to chop. It is not a disposal of timber, but rather a sale of logs, that is being discussed. Because the revenue is regarded as regular income and taxed as such, there is no opportunity to elect the more advantageous capital gains classification.
The way through which you dispose of the timber has a substantial impact on your tax liability and obligations. If you qualify for capital gains, you may be able to save anywhere from 5 percent to 20 percent on revenue taxes compared to landowners who consider earnings from wood sales as regular income, depending on your circumstances. Capital gains provisions are advantageous to retired forest owners since the money generated does not count toward the amount of income they may earn before their Social Security payments are lowered.
- In addition, self-employment tax may be due, and owners may be required to pay worker’s compensation insurance.
- Because of the loss of capital gains treatment and the intricacy of the regulations, most private forest owners have little or no incentive to sell trees roadside or under the procedures of Section 631(a).
- A stumpage sale, which is the selling of standing wood that has been identified by a forester, is typically preferable for the landowner in the long run.
- Selling trees by the roadside is dangerous since the trees have already been cut and will begin to decay in quality if the price lowers.
- Finally, a final thought.
- The worth of the timber in relation to other assets at the time of acquisition serves as your foundation for calculation.
- The majority of landowners will require the assistance of a forester or an accountant in order to determine their basis allocations.
- You can also minimize your tax liability by deducting expenditures linked with the sale, such as fees paid to your forester, solicitor, or surveyor, from your taxable income.
As a basic illustration (consult with your tax professional regarding your individual situation): You collected $30,000 from your timber sale, $22,000 from the basis removed during the harvest, and $1,500 in fees for professional services because your forester and attorney charge by the hour, resulting in a net profit of $30,000.
Additional parts of the federal tax law give considerable financial benefits to private forest owners who are purposeful in the management of their woodlot with the aim of producing a profit.
There are various variables to consider, but you will need a well-crafted management plan as well as a solid working relationship with a skilled forester and tax preparer to be successful.
Even if you are not required to submit Form T-Timber with the IRS, the information contained in it might be useful in a variety of computations and record keeping.
He may be reached by phone at (607) 592-3640 or by email at [email protected] More information regarding woodlot management may be found at www.ForestConnect.info, where you can also access papers, webinars, and an Ask Questions link.
Managing Your Timber Sale Tax
Managing your timber sale tax is an important element of effectively managing your timber. Although the sale of your standing timber may be taxable, the question is whether the Internal Revenue Service (IRS) would treat the sale as ordinary income or if you will be allowed to record the revenue as a long-term capital gain. There are a number of compelling reasons to be certain that the sale of your timber results in a capital gain for tax purposes. In the first instance, the revenue generated by your sale will be taxed at a reduced rate.
Capital losses, on the other hand, can only be used to offset up to $3,000 in ordinary income per year.
Qualifying your timber sale for capital gains treatment
Managing your wood sale tax is an important aspect of effectively managing your forest. Although the sale of your standing timber may be taxable, the question is whether the Internal Revenue Service (IRS) would treat the sale as ordinary income or if you will be entitled to deduct the revenue as long-term capital gain. There are a number of compelling reasons to be certain that the sale of your timber results in a capital gain on your tax returns. It will be less expensive to tax the proceeds of your transaction in the first place.
Ordinary income, on the other hand, can only be offset by capital losses up to a maximum of $3,000 in a single year.
Timber for personal or investment purposes
Managing your wood sale tax is an important aspect of effectively managing your forest resources. Although the sale of your standing timber may be taxable, the question is whether the Internal Revenue Service (IRS) would treat the money as ordinary income or if you will be allowed to record the income as a long-term capital gain. There are a number of compelling reasons to ensure that the sale of your timber results in a financial gain. First and foremost, the revenue generated by your sale will be taxed at a reduced rate.
Capital losses, on the other hand, can only be used to offset up to $3,000 of ordinary income per year.
Timber as a business
Is it a business if you own timberland?
The answer to this question is dependent on the facts and circumstances surrounding both your actual and anticipated use of the property. Two qualities of a company are as follows:
- Activities and transactions occurring on a regular basis
- The generating of income
If you sell timber on a more frequent basis than what the Internal Revenue Service regards to be “occasional revenue from an investment,” your timber ownership will be treated as a company by the Internal Revenue Service. Your involvement (participation) in your wood business can be categorized as either “active” or “passive,” depending on how you interact with others. If you have an active business interest, it indicates that you “materially engage” in the company’s operations. The term “passive” refers to the fact that you are not actively involved in the running of the business.
Furthermore, it makes no difference to the IRS whether your spouse has a financial stake in the property or whether you and your spouse file a joint or separate tax return.
- It is estimated that you and your spouse put in more than 500 hours working in your company activity throughout the tax year. Participants in the business activity who are not related to you or your spouse account for a large portion of the total involvement (including that of all other participants) for the tax year. Your participation in the business activity totals more than 100 hours throughout the tax year, and no other individual engages for a greater amount of time than you and your spouse. If you and your spouse participate in all of your “major participation activities,” which includes your timber activity, you and your spouse will have logged more than 500 hours throughout the tax year. A “substantial participation activity” is a trade or company in which you or your spouse materially participate for more than 100 hours during the tax year that qualifies as a “major participation activity.” To illustrate: If another person shares ownership of a wooded property with you, then you may be able to qualify with 100 hours even if that person spends more hours working in the company than you do. You and your spouse had a significant involvement in the business activity for at least five of the ten previous tax years, whichever is greater. In order to qualify in any of those years, you must complete the 500-hour exam. You and your spouse have participated in the business activity in a regular, continuous, and substantial fashion throughout the tax year based on all of your facts and circumstances. To pass this test, you must be the manager who is in charge of making choices on the management of the resource under consideration. This does not rule out the possibility of engaging a consultant to help you establish a strategy. In order to fulfill the facts and circumstances test requirement for the tax year, you must at the very least participate in the business activity for more than 100 hours during the year.
What is the best way to demonstrate tangible participation? Your hours can be documented in any acceptable manner, including (but not limited to) appointment books, calendars, and narrative summaries, as long as you follow the rules. While daily records are not necessary, they are the most effective method of meeting the hours test requirements. As long as you do not fulfill the requirements for active involvement, you will be subject to the laws governing passive income. Particularly noteworthy is the fact that losses from passive activities can only be utilized to offset revenue from passive activities.
Summarizes capital gains treatment according to the purpose of ownership and the method of selling timber.
|Personal use/hobbyist||Investor||Active business|
|Lump sum||Taxed as capital gainsQualifies as a capital asset under Section 1221 of the IRC||Taxed as capital gainsQualifies as a capital asset under Section 1221 of the IRC||Timber sold on or after Jan. 1, 2005 can be taxed as capital gainTimber sold before Dec. 31, 2004 is taxed as ordinary income|
|Economic interest retained/shares contract||Date of sale is the date volume and value are determinedSeller’s share should be payment for stumpage and is taxed as capital gain||Date of sale is the date volume and value are determinedSeller’s share should be payment for stumpage and is taxed as capital gain||Income from the sale of the stumpage can be taxed as capital gain under Section 631(b) of the IRC|
|Election to treat the cutting as a sale||Does not apply||Does not apply||Income from the sale of the stumpage can be taxed as capital gain under Section 631(a) of the IRC|
A flat sum payment, economic interest retention, and cutting of standing wood with the option to treat it as a sale are the three primary techniques for selling or disposing of standing timber, respectively. a one-time payment This way of selling wood is known as the “lump sum” approach because it involves the outright sale of timber to another party by deed or contract for an amount that has been agreed upon in advance. The sale may include certain species, dimension classes, or timber that has been indicated as being available for purchase.
- Furthermore, the buyer bears the risk of fire, wind damage, or any other natural disaster that may occur while the timber is in his possession or under his control.
- If the timber was sold after December 31, 2004, a lump sum sale of timber kept principally as part of a company would qualify for capital gains treatment as well as ordinary income treatment.
- In certain circles, this practice is known as “pay as you cut,” because the timber is paid for as each unit of timber is cut and carried to the mill for measurement, rather than in lump sums.
- Consequently, should a natural disaster strike and cause damage to the trees, the seller will bear the burden of ownership.
- Property held for business purposes that is sold with “an economic interest retained” qualifies for capital gains treatment under Section 631(b) of the Internal Revenue Code.
- However, because a log is not considered a capital asset, the volume and value of a log sale are calculated based on the volume and value of the log sold.
- The revenue from selling logs should be separated into two categories: capital gain income (from the sale of stumpage) and regular income (from the sale of logs) (from the conversion of the stumpage into logs).
Cut standing timber and decide whether or not to consider it as a sale.
If the owner harvested the timber before January 1, 2005, and the logs or items made from them are sold, all of the money must be reported as ordinary income unless the owner elects to follow Section 631 of the Internal Revenue Code (a).
The sale proceeds must be separated into two component portions in order to use this technique of division.
This difference then becomes a Section 1231 gain or loss, which is added to any additional Section 1231 profits or losses that may exist, and the net gain (if there is one) is regarded as a long-term capital gain under the Internal Revenue Code.
These items can be found in a variety of forms, including raw materials such as sawlogs or pulpwood, as well as completed goods such as paper, dimension lumber, railroad ties, posts, poles, and fiberboard-type products, to name a few examples.
The fair market value of the timber is then used to calculate the cost of the timber.
Important rule change
Once upon a time, the method you chose for selling your wood was critical in deciding whether or not you could claim capital gains treatment. After Jan. 1, 2005, any of the ways indicated above will qualify the sale for capital gains treatment, if the requirements for ownership term and ownership purpose are fulfilled, as long as the other requirements are met. As of January 1, 2005, lumber sold as a lump sum by an operating company on the stump (stumpage) and received by the seller on or after that date qualifies for capital gains treatment.
It is only one of the numerous tax concerns that a forest landowner has to deal with, including whether or not a wood sale qualifies for capital gains treatment. The Forest Landowners’ Guide to the Federal Income Tax is a valuable resource for information on federal income taxes (USDA Forest Service, Agriculture Handbook number 718). The tax code, on the other hand, is continually evolving. The National Wood Tax website is a good resource for keeping up with the newest developments and submitting your unique timber tax query to a panel of specialists.
That savings money belongs to you entirely.
The authors wish to acknowledge Larry G. Bishop for his review of this article.
The federal income tax rules contain measures that are special to forestry and are critical to the management and conservation of wood resources. A guide to the appropriate Federal Income Tax rules and regulations, including the most recent tax law amendments, for forest owners, foresters, loggers, and wood enterprises that are preparing their 2019 tax returns is provided in this publication. The information provided is not meant to be used in the provision of legal or accounting advice, and it is current as of September 30, 2019.
Timber Property Classifications
The classification of your wood property for tax purposes is critical since the tax treatment and related tax reporting for each type of property differ significantly from one another. There are three types of timber classifications, each of which is determined by your ownership purpose, how you use the property, and the activities you engage in: (1) an investment property (which is primarily used for producing income from growing timber or asset appreciation); (2) a personal-use property (which is primarily used for personal enjoyment rather than for profit); and (3) a business property (having regular, active, and continuous income-producing timber activities).
If you do not participate in the business in a meaningful way (i.e., if you engage in “passive activity”), losses from the business are not deductible against income from a nonpassive source of income (passive loss rules).
Losses that are deductible for a business are not deductible for a recreational activity.
A decision of your wood property category must be made at least once every year. Example 1: In 2019, you sold timber from your 49-acre forest property, which brought in $1,500. You possess the timber primarily for the purpose of profiting from it, and you consider your timber as an investment.
If you have owned standing timber as an investment or for personal use for more than one year before to selling it, you may be able to claim long-term capital gains rather than ordinary income on the sale if you sell it for more than $1 million (inherited timber is automatically considered long-term). The sale expenditures, as well as the depletion of the timber (see below), are all deductible from the sale revenues. In order to report the transaction, use Form 8949 and Form 1040 Schedule D. Exemple No.
- The amount of $2,500 in selling expenses was charged to you.
- When the transaction was completed, the seller qualified for long-term capital gains, which can be reported on Form 8949 and Schedule D of Form 1040.
- If the timber is kept for more than one year prior to the sale, the sale of business timber may be eligible for long-term capital gains (Section 1231 profits) under Section 631(b).
- It is advisable to file Form T (Timber), Forest Activities Schedule, with the appropriate authorities (see below).
- You agreed to accept the highest bidder’s offer.
- If the business taxpayer chopped his or her own timber (or had “a contract right to cut” the timber) for the purpose of selling it or using it in his or her trade or company, the requirements are different.
- That is, on Form T, Forest Activities Schedule, Part II, choose the Section 631(a) option to be considered.
- 4: It was your idea to hire and direct a logger to chop your standing wood, and you sold the logs to a mill you specified for $20,000 in return for your time and effort.
If the fair market value (FMV) of the standing timber on January 1, 2019, was $15,000, and your timber depletion (see below) was $2,000, and you made a Section 631(a) election, you could report $13,000 ($15,000 – $2,000) as capital gains and $1,000 ($20,000 – $15,000 – $4,000) as ordinary income if the FMV of the standing timber was $15,000 on January 1, 2019.
Section 1231 earnings that are classified as capital gains, on the other hand, are not considered eligible business income.
For single taxpayers with adjusted gross income (AGI) in excess of $200,000 (or $250,000 for couples), wood sales from an investment or passive company may also be subject to a 3.8-percent net investment income tax.
Form 1099-S, Proceeds from Real Estate Transactions, is needed for every standing timber transaction that is either lump-sum or pay-as-cut (Corporate and high-volume business sellers are exempt.). Timber Basis and Depletion Deduction are two types of depletion deduction. Depending on how you acquired your timber property, the basis of your timber relates to your initial investment in the wood. The basis of your timber is defined differently depending on how you acquired your timber property. In the case of bought property, your timber basis is the cost of the timber itself, which is assigned independently from the cost of the land.
- In the case of inherited property, the fair market value of the timber on the decedent’s death date is used (or alternate date).
- Example 5: You paid $33,000 for a section of pine forest, which was your complete investment (2,000 tons of pulpwood).
- The land was valued at $11,000 at the time of purchase.
- The amount of depletion is deducted from the proceeds of the wood sale.
- This year, you sold 500 tons of sawtimber and 3,000 tons of pulpwood, bringing in $5000.
Deductions of Timber Expenses and Taxes
Expenses related to timber (as well as some other “miscellaneous itemized deductions”) are not deductible for investment purposes in 2019. (Public Law 115-97). In the event that you participate in your timber business on a substantial basis, they are completely deductible on Schedule C of Form 1040. Expenditures for insect, disease, and fire management, firebreak maintenance, overnight travel, precommercial thinning, vegetation-competition control, depreciation on equipment utilized, and fees paid to a forester, attorney, or accountant are examples of such expenses.
State and municipal property taxes paid on forestry investment property are deducted from your federal income tax.
Casualty Loss of Timber and Landscape Tree
A tax deduction may be available for the loss of wood as a result of a casualty event such as a hurricane, fire, earthquake, tornado, hail, or ice storm. Timber owned as an investment or a company is eligible for a loss deduction if it is less than the lesser of its adjusted basis in timber or the difference between its fair market value immediately before and after the casualty occurred in the block. Separately report the sale of salvaged timber from other sales. If the proceeds from the salvage sale exceed the adjusted basis in the timber and the accompanying selling expenditures, a taxable gain may ensue.
Example 7: A cyclone destroyed your investment timber, which included a timber foundation of $6,000 and was worth $6,000.
A certified professional estimated the fair market value (FMV) loss of the timber prior to and during the hurricane to be $10,000. It is estimated that your casualty loss deduction would be $6,000.
For each qualifying timber property, taxpayers can deduct up to $10,000 in qualified reforestation expenditures (or $5,000 if married couples file separately) every year (QTP). Any sum in excess of $10,000 each year per QTP may be deducted over a period of 84 months under certain conditions (amortized). Trusts are the only entities that qualify for amortization. The deduction should be reported as an adjustment to gross income on the front of Form 1040 for investment purposes, or on Schedule C for business purposes, depending on the kind of business.
- A statement detailing the date, the place, and the amount of the spending should also be included with the return.
- and Mrs.
- This year, they take a $10,000 deduction plus one-fourth ($500) of the remaining $7,000, for a total deduction of $10,500.
- In 2026, they will deduct the final 1/14th (or $500) of their salary.
Depreciation, Section 179 Expensing and Bonus Depreciation
Depreciation is a tax deduction that you can claim for the cost (or other basis) of properties that you utilized in the production of hardwood (e.g., logging equipment, tractor, or temporary road). Land does not have a depreciation schedule. During 2019, business taxpayers may decide to deduct up to $1,020,000 for qualified property, subject to a $2,550,000 yearly phaseout and restrictions on company taxable income (Section 179). A bonus depreciation of up to 100 percent of the cost of qualified property is also available to taxpayers under certain conditions.
Unless they qualify for an income exclusion, cost-share payments are treated as regular income (Section 126). The cost-share payment must originate from a qualified program and be spent for capital expenditure in order to be eligible for the income exclusion. The Forest Health Protection Program, the Conservation Reserve Program (CRP), the Conservation Security Program, and the Environmental Quality Incentives Program are examples of federal programs that qualify for income exclusion under the law.
the current value of the greater of $2.50 (fixed) per acre or 10 percent of the average annual revenue from the affected acres over the previous three years, whichever is larger.
If you received $9,600 in rental revenue from the property in the previous three years, you might deduct up to $6,400 ((10 percent x ($9,600 / 3)) from your taxable income (5.00 percent).
Attach a statement to the tax return that describes the cost-sharing program and the computations for the exclusion from income.
Form T (Timber)
For those who claim a timber-depletion deduction, sell cut goods in the course of their business (under Section 631(a)), or sell whole logs of business timber, Form T (Timber), Forest Activities Schedule, is required. If, on the other hand, you simply have sporadic timber sales, it is not necessary (one or two sales every 3 or 4 years).
If you donate an eligible conservation easement, you can claim a philanthropic deduction. The deduction is limited to up to 50% (or 100% for eligible farmers and ranchers, including forest landowners) of the taxpayer’s adjusted gross income (AGI) in a given year. For a period of 15 years, any excess amount of gift over the AGI limit may be carried forward to the next year.