Tax Tips for Forest Landowners for the 2008 Tax Year

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Mount Katahdin, Maine

COOPERATIVE FORESTRY TECHNOLOGY UPDATE

1720 Peachtree Road NW, Atlanta, GA 30309

U.S. Department of Agriculture Forest Service Southern Region

Tax Tips for Forest Landowners for the 2008 Tax Year

by Linda Wang, Forest Taxation Specialist

and John L. Greene, Research Forester, Southern Research Station

This bulletin summarizes key federal income tax provisions for

forestland owners, foresters, loggers, forest product businesses,

and tax practitioners. It is current as of October 1, 2008, and

supersedes Management Bulletin R8-MB 130. Consult your

tax and legal professionals for advice on your particular tax

situation.

Timber Sales

If you have held standing timber for over 12 months, income

from the sale or disposal of the timber generally qualifies as a

long-term capital gain. This is an advantage since, among other

reasons, long-term capital gains are taxed at lower rates than

ordinary income and are not subject to self-employment tax.

Short-term capital gains are taxed at the same rates as ordinary

income. For most individual forestland owners, the tax rate for

long-term capital gains is 15%. From 2008–2010, however, a

special 0% rate applies to long-term capital gains which, when

added to your ordinary income fit under the ceiling for the 15%

bracket for ordinary income ($32,550 for single taxpayers,

$65,100 for married taxpayers filing jointly). Also, income

from timber which a C corporation has held for more than 15

years is subject to a 15% capital gains tax rate, effective one

year beginning on May 22, 2008.

Example 1. In 2008 you sold 200 tons of pine sawtimber out

of a total of 1,000 tons on your entire tract for $8,000. Your

basis for the entire tract is $10,000 and your sale expenses

were $900. Your depletion unit is $10/ton ($10,000 ÷ 1,000

tons). Your taxable gain is $5,100 ($8,000 – (200 tons x $10/

ton) – $900).

If you sell cut timber, only the gain from appreciation of the

standing timber can qualify as a capital gain; the value added

by cutting and hauling the timber is ordinary income. Further,

you only can treat the value of the standing timber as a long-

term capital gain if you have a an IRC section 631(a) election

in effect. Make the election on Form T, Part II.

Investors report timber income on Form 1040, Sched. D, and

active business owners report it on Form 4797. If you claim a

depletion deduction, sell timber lump-sum under section 631

(b), or make or use a 631(a) election, you also must file Form

T; the form is available at http://www.irs.gov/pub/irs-pdf/

ft.pdf. Partnerships and LLCs file Form 1065, Sched. K and

K-1. S corporations report it on Form 1120S, Sched. K and K-

1, and C corporations on Form 1120.

If you receive payments from the sale or disposal of timber in

2 or more years, you can use the installment method to spread

the income – and the tax on it – over the years you receive

payments. Report an installment sale first on Form 6252, and

then the amount can be carried over either to Form 4797 or

Sched. D of Form 1040.

Timber Management Expenses

If you manage your forestland for profit – as an investment or a

trade or business – you can deduct ordinary and necessary timber

management expenses. These include timber cruises, fees paid a

consulting forester, brush control, protecting the forest from fire,

insects and disease, tools of short useful life, precommercial thin-

ning, timber stand improvement, hired labor, and mid-rotation

fertilization. Costs associated with reforestation, including super-

vision by a forester and brush control, are subject to the refores-

tation deduction and amortization provisions (see below). Costs

associated with a timber sale, including a pre-sale timber cruise,

are deductible from the sale proceeds. Property taxes and interest

paid also are currently deductible, but you may elect to capitalize

them if doing so provides a tax benefit. Car and truck expense

related to timber activities also may be deducted using either the

standard mileage allowance (50.5 cents per mile for 2008) or the

actual expenses (including depreciation if you own the vehicle).

For investors, property taxes are fully deductible in the Taxes

You Paid section of Form 1040, Sched. A. Other management

expenses, however, must be reported in the Job Expenses and

Certain Miscellaneous Deductions section, where they are com-

bined with other such deductions and only the amount that ex-

ceeds 2% of your adjusted gross income is deducted. Active

business owners deduct all management expenses, including

property taxes and interest paid, on Form 1040, Sched. C. Man-

agement deductions may be disallowed unless you can substanti-

ate them. This makes it important to keep supporting records

such as sales slips, receipts, invoices, canceled checks, and mile-

age records and have them on hand for an IRS examination or

audit.

Forest Planting Cost

You can deduct outright the first $10,000 per year ($5,000 per

year for married couples filing separately) of reforestation ex-

penses per qualified timber property and amortize (deduct) any

additional amount over 8 years. These provisions apply both to

the cost of establishing a plantation and practices to encourage

natural regeneration.

Example 2. You planted pine seedlings in 2008 at a cost of

$6,000. You can deduct all $6,000 outright because it is less than

$10,000. Investors take the deduction on the front of Form 1040,

as an adjustment to income; material participants take it on Form

1040, Sched. C or F (if you qualify as a farmer).

If the planting cost had been $14,000, you only could deduct

$10,000 outright. But you could take an amortization deduction

for 1/14th of the remaining $4,000 ($287) on your tax return for

2008, 1/7th ($571) on your returns for 2009 through 2014, and the

last 1/14th on your return for 2015. Elect to amortize and show

your deductions on Form 4562, Part VI.

Depreciation and the First-Year Expensing

You may take annual depreciation deductions to recover your in-

vestment (basis) in property such as timber equipment, machinery,

buildings, bridges, culverts, temporary roads, fences or the sur-

faces of permanent roads you placed in service for timber produc-

tion. Cars, light-duty trucks, logging equipment, and road building

equipment generally are depreciated over a 5-year period. If you

purchased property for your timber business in 2008, you can elect

to expense up to $250,000, subject to phase-out and taxable in-

come limitations, up from $128,000. In addition, for property pur-

chased and placed in service in 2008, a bonus depreciation in the

amount of 50% of the property costs is available.

Cost-share Payments

If you received a payment from a public cost-share program, you

also should receive a Form 1099-G. If the program is approved

under section 126, however, you can elect to exclude a calculated

portion of the payment from your gross income. Approved federal

programs include the Conservation Reserve Program (CRP), Envi-

ronmental Quality Incentives Program (EQIP), Wildlife Habitat

Incentives Program (WHIP), and Wetlands Reserve Program

(WRP). Cost-share programs for southern pine beetle and moun-

tain pine beetle are under IRS review, but as of press time, had not

been approved for exclusion. Several state programs also qualify.

The amount of a cost-share that can be excluded is the present

value of the larger of $2.50 per acre or 10% of the average annual

income from the property over the last 3 years. Calculating present

value requires using an interest rate, but the IRS has provided little

guidance as to what rate to use.

Example 3. You received a $3,000 cost-share from EQIP in 2008.

Your only income from your 40-acre forestland in the last 3 years

was $9,000 from a 2006 timber sale. Using 7.56%, the 2008 Farm

Credit Bank interest rate for your region, you can exclude all

$3,000 of the cost-share from your gross income: $2.50 x 40 acres

= $100 and 10% x ($9,000 ÷ 3) = $300; the present value of $300,

the larger of the two amounts, is $300 ÷ 7.56% = $3,968, which is

more than the cost-share. Attach a statement to your tax return

showing the amount and nature of the cost-share payment and

how you determined the excludable amount.

CRP Rental Payments

Land rental payments received under CRP are not cost-shares and

cannot be excluded from gross income. Beginning in 2008, how-

ever, CRP rental payments are exempt from self-employment tax

for taxpayers who are retired or disabled.

Timber Basis

Basis is a measure of your investment in timber. The total cost of

acquiring purchased forestland should be allocated proportionately

among capital accounts for the land, the timber, and other capital

assets acquired with them. The fair market value of inherited for-

estland should be allocated similarly. This usually results in a

step-up in basis because the fair market value of the property is

higher than the decedent’s basis.

Establishing your basis can lower your income tax by reducing

the taxable amount of timber income. It also can help you recover

reforestation costs or your investment in timber lost in a casualty

or theft. If you did not establish your basis when you first ac-

quired your timber, you can do it retroactively. You may need a

professional forester to determine the volume and value of the

timber at the time you acquired it. If you acquired your timber or

forestland many years ago, you should compare the potential tax

savings from establishing your basis retroactively with the time

and expense involved, to see whether it is financially worthwhile.

Report your original basis in timber and land on Form T, Part I.

Timber Casualty Losses

You can take a deduction for timber lost in a casualty – an event

that is sudden, unexpected, and unusual, like a fire, ice storm or

hurricane. Start with the timber “block” that includes the dam-

aged area (if you keep track of all your timber in one account,

that is your timber block). Your deduction is the lesser of the

decrease in value caused by the casualty or your basis in the tim-

ber block.

Example 4. This year a hurricane destroyed timber on your 50-

acre tract. Your forester estimates the timber was worth $10,000

before the storm but only $1,000 after, a $10,000 decrease in

value. Your basis in the timber is $2,000. Your casualty loss

deduction is $2,000, the lesser of the two numbers.

Keep in mind the IRS may verify your basis and damage esti-

mate. Report a casualty loss on Form 4684, Section B; adjust

your timber basis on Form T, Part II.

Like-Kind Exchanges

Instead of selling appreciated timberland, paying tax on the in-

come and then acquiring replacement property using after-tax

dollars, you can structure the transaction as a like-kind exchange

(section 1031 exchange) so that gains are not currently taxed. To

qualify, you must identify the replacement property within 45

days after closing on the relinquished property. The exchange

must be completed by the earlier of the 180 days after the closing

of the relinquished property or the due date (including exten-

sions) of the tax return in the tax year of exchange.

Conservation Easements

You can take a charitable contribution deduction for donation of

a permanent conservation easement. The amount you can deduct

for 2008 is limited to 50% of your adjusted gross income, but

your can carry forward any unused amount to be deducted over

the next 15 years. If you generate more than 50% of your total

income from a timber business, the amount you can deduct is

limited to 100% of your adjusted gross income.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all

its programs and activities on the basis of race, color, national origin, age,

disability, and where applicable, sex, marital status, familial status, parental

status, religion, sexual orientation, genetic information, political beliefs,

reprisal, or because all or a part of an individual’s income is derived from

any public assistance program. (Not all prohibited bases apply to

allprograms.) Persons with disabilities who require alternative means for

communication of program information (Braille, large print, audiotape, etc.)

should contact USDA’s TARGET Center at (202) 720-2600 (voice and

TDD). To file a complaint of discrimination write to USDA, Director,

Office of Civil Rights, 1400 Independence Avenue, S.W., Washington, D.C.

20250-9410 or call (800) 795-3272 (voice) or (202) 720-6382 (TDD).

USDA is an equal opportunity provider and employer

References:

Haney, H. L., Jr.; Hoover, W. L.; Siegel, W. C.; and Greene, J. L.

2001. Forest Landowners Guide to the Federal Income Tax.

Agric. Handb. 718. Washington, DC: U.S. Department of Agriculture.

This book may be downloaded free:

http://www.timbertax.org/publications/aghandbook/aghandbook.asp.

National Timber Tax Website: www.timbertax.org