Activities: Financial Considerations

How these activities will help you as a woodland owner:

If you generate income and expenses from your woodland, this will help you with income tax reporting. It also will alert you to property tax programs for managed forest land, help you predict financial returns from forestry investments, and get started with estate planning.

List of Activities and Topics

• Federal Income Tax Guidelines
• Property Taxes
• Financial Analysis of Woodland Investments
• Planning for Your Woodland Legacy

Federal Income Tax Guidelines

Step 1: Defining your operation

• Step 1A: Read the section on Defining Your Operation.
• Step 1B: Refer to a tax advisor if necessary to determine whether you should report forestry-related income as an
  • individual or
  • corporation

  and whether you own woodland primarily for

  • personal use
  • investment
  • active business, or
  • passive business.

  How you report forestry income and expenses depends on a correct classification of your enterprise.

  This chapter focuses on taxpayers as individuals managing timber as an investment or as sole proprietor of a business. If you are not managing your woodland with the intent to make a profit, much of this chapter may not apply to your situation.

• Step 1C: Managing woodland as a business provides the most opportunities to deduct forestry-related costs in a timely manner. Taking the following steps will help prove to the IRS that you are managing your woodland as a business:
  • Get a written woodland management plan that includes
    • A goal to make a profit from the growth, management, and sale of forest products.
    • Information necessary to make business decisions on each management unit, e.g., timber volume, value, management actions planned, and a timeline for those actions.
  • Maintain a timber account showing your basis or original value of all timber and any subsequent additions or subtractions from that basis.
  • Keep a journal of forest management activities and their associated costs or income. At a minimum include the following:
    • Forest related work completed or proposed
    • Why did or will you conduct the work
    • Relation of the work to increased productivity, production of timber, or resource protection
    • Date of activity
    • Hours you or your family spent on the activity
    • Hours others spent on the activity:
    • Who was involved:
    • Miles traveled:
      -Odometer Start:
      -Finish:
    • Amount of revenue generated
    • Amount of expenses incurred
    • Acres affected
    • Comments
  • See Appendix XX for a sample journal
  • Produce a financial analysis for significant management investments, such as large-scale tree planting or road building (see Financial Analysis of Woodland Investments)
  • Develop documents that provide for the transfer of the woodland business to heirs or other owners (see Estate Planning)

Step 2: Determine Expenses

• Step 2A: Read the section on Expenses.
• Step 2B: Set up accounts (a record keeping system) to record different types of expenses:
  • Capital expenses – record original basis, how the basis was determined, quantity of assets (e.g., acres of land, cords of wood), and date of acquisition.
    • Land account – recover costs when land is sold.
    • Timber account
      • Merchantable timber account– recover costs through depletion allowance when timber is sold.
      • Young growth (naturally regenerated trees of premerchantable size) – move costs to merchantable timber account when timber reaches merchantable size.
      • Plantations (planted trees of premerchantable size).
    • Depreciable Land Improvements account – recover costs through depreciation.
    • Equipment account – recover costs through depreciation or Section 179 Deduction.
  • Operating Expenses and Carrying Charges – record expense, purpose, and date. How you deduct these expenses depends on whether your enterprise is for personal use, an investment, an active business or a passive business.
  • Employee Expenses – withhold, deposit, report, and pay:
    • Income tax withheld from employee’s wages.
    • Social Security and Medicare taxes (employer and employee portion).
    • Federal unemployment tax (paid by employer; not withheld from wages).
    • IRS Form W-2 at end of each year.
  • Timber sale expenses – Deduct sale-related expenses (e.g., advertising, timber cruising, marking, scaling, and fees for a consulting forester or attorney) from timber sale income to determine net taxable income (or loss). These expenses are deductible in the year of sale regardless of your purpose for holding timber or the type of taxpayer.

Step 3: Determine your Timber Sale Income

• Step 3A: Read the section on Timber Sale Income.
• Step 3B: Before conducting your next timber sale, review this section to determine the income tax implications of different sale methods:
  • Lump sum sale
  • Pay-as-cut sale
  • Harvest timber, then sell products
  • Installment sale

  Different sale methods may affect how you determine the amount of income, whether income is a capital gain or ordinary gain, and how you report income.

Step 4: Determine other timber-related income

• Step 4A: Read the section on Other Timber-Related Income.
• Step 4B: Report the sale of products derived from trees as ordinary gains or losses, e.g.,
  • Logs
  • Lumber
  • Pulpwood
  • Poles
  • Fence posts
  • Crossties
  • Fuelwood
  • Chips
  • Maple syrup
  • Fruit
  • Nuts
  • Bark
  • Nursery stock
  • Limbs and tops left after logging

Step 5: Fill out Form 1099

• Step 5A: Become familiar with Form 1099, Information Return
• Step 5B: You are obligated to report timber sale and cost-share income to the IRS whether or not you receive a Form 1099 from the payer.

Step 6: Determine cost-sharing payments

• Step 6A: Report cost-share payments for timber stand improvement as ordinary income. Then deduct or capitalize the full cost of the practice as an operating expense.
• Step 6B: If you received cost-share payments for reforestation, determine whether the IRS allows that payment to be excluded from income or not. Ask the agency that provided the cost-share payment whether it has been approved for the exclusion or ask the IRS.
  • If you are required to include the cost-share payment in income, then report that payment as ordinary income. But you may be able to currently deduct or amortize cost-share payments included in income.
  • If you are qualified to exclude the cost-share payment from income, perform the calculations necessary to determine what portion may be excluded.

Step 7: Determine if you have a Casualty Loss

• Step 7A: Did you have a casualty loss to timber? A casualty loss is a sudden, unexpected loss due to a natural or manmade causes such as a fire, windstorm, tornado, or hail.
• Step 7B: Salvage as much timber as possible.
• Step 7C: Make a claim with your insurance company if your timber was insured.
• Step 7D: Determine your allowable basis in the timber destroyed to report a casualty loss. You will need an appraisal. A consulting forester can be hired to assess the loss.

Property taxes

Step 1: Read about property taxes

• Read the section on Property Taxes.

Step 2: Itemize your deductions

• If you itemize deductions on your income taxes, deduct the cost of property taxes on your woodland, regardless of your reason for owning it.

Step 3: Learn more about taxes for your woodlands

• Step 3A: Contact your county assessor to find out what property tax classification your woodland is in.
• Step 3B: Ask your assessor and your forester what other property tax or incentive programs are available that may reduce the cost of such taxes. Most states offer lower property taxes on forest lands managed under a plan developed by a forester. Other qualifications may need to be met.

Financial Analysis of Woodland Investments

Step 1: Conduct a financial analysis of your woodland

• Step 1A: Read the section on Financial Analysis of Woodland Investments.
• Step 1B: If you are managing your land with the intent to make a profit, then conducting a financial analysis of significant woodland investments (e.g., major tree planting or road building) is a good idea.
• Step 1C: Follow the recommended steps in a Financial Analysis:
  • Identify your objectives, potential projects, and level of involvement.
  • Determine the schedule of activities for each project.
  • Attach dollar values to each project activity.
  • Discount values to the present.
  • Make a decision.

Planning for Your Woodland Legacy

Step 1: Start your planning

• Step 1A: Read the section on Planning for Your Woodland Legacy.
• Step 1B: Discuss your goals for the woodland you own with family members and others that have a stake in it. Listen to their concerns and expectations.
• Step 1C: Get an accurate appraisal of the value of your woodland and other assets.
• Step 1D: Determine the impact of state and federal estate taxes on the disposition of your estate. You may need to work with an estate planner.

Step 2: Prepare a will

• Step 2A: Prepare a Will to insure that taxes and creditors are paid and assets are transferred to heirs as you wish.
• Step 2B: Designate beneficiaries on financial accounts to keep them out of probate.

Step 3: Think about continuing your forestry business

• Step 3A: Talk to an estate planning attorney about whether a trust is appropriate for you.
• Step 3B: If you want your forestry business to continue after your death, talk to an attorney about what type of business ownership is most appropriate. Options include, but may not be limited to: sole proprietorship, joint tenancy, tenancy-in-common, family limited partnership, limited liability company, S corporation, and C corporation.
• Step 3C: Consider whether a conservation easement or land donation may help fulfill your legacy. A conservation easement or land donation may result in an income tax or estate tax deduction if the land is properly valued and the receiving organization is a government body or 501(c)(3) organization. Search the Internet for public agencies and nonprofit land trusts that offer conservation easements or that accept land donations.
  1. Read the section on Estate Planning
  2. Discuss your goals for the woodland you own with family members and others that have a stake in it. Listen to their concerns and expectations.
  3. Get an accurate appraisal of the value of your woodland and other assets.
  4. Determine the impact of state and federal estate taxes on the disposition of your estate. You may need to work with an estate planner.
  5. Prepare a Will to insure that taxes and creditors are paid and assets are transferred to heirs as you wish.
  6. Designate beneficiaries on financial accounts to keep them out of probate.
  7. Talk to an estate planning attorney about whether a trust is appropriate for you.
  8. If you want your forestry business to continue after your death, talk to an attorney about what type of business ownership is most appropriate. Options include, but may not be limited to: sole proprietorship, joint tenancy, tenancy-in-common, family limited partnership, limited liability company, S corporation, and C corporation.
  9. Consider whether a conservation easement or land donation may help fulfill your legacy. A conservation easement or land donation may result in an income tax or estate tax deduction if the land is properly valued and the receiving organization is a government body or 501(c)(3) organization. Search the Internet for public agencies and nonprofit land trusts that offer conservation easements or that accept land donations.