Tree Farmer - November/December 2010 - (Page 36)

Tips on By wang & LInDa the books • You manage your timber as the sole proprietor of a business. You keep business records, including the number of hours of your participation in the business to establish that you materially participate in its operation. Your woodland is business property for tax purposes. closing on 2010 a business, you would report the sale on Form 4797 and Schedule D. Income from sale of cut (vs. standing) timber is taxed in two parts. The difference between the fair market value (FMV) of the standing timber on the first day of your tax year and your basis in it is taxed as a capital gain (to qualify as a long-term capital gain you must have held the timber more than one year before cutting it for use in your business). The difference between the proceeds from the sale of the cut products and the sum of the FMV of the standing timber and the cost of converting it into products for sale is taxed as ordinary income (sec. 631(a)). Example 2: You paid a contractor $2,000 to cut standing timber you had held more than one year into logs, then sold the logs to a mill for taxing issues Greene 36 joHn L. This article provides tax tips for woodland owners and their tax advisors in the preparation of the 2010 individual tax return. Please be aware that the information presented here is not legal or accounting advice. Consult your legal and tax advisors for more complete information. Timber as Personal, Investment, or business Property The tax rules vary depending on whether your woodland is personal, income-producing (investment), or business property. You must make this determination for your holding each tax year. If you do not have a profit motive, your timber may be personal property, which provides limited opportunities for deductions. If you have a clear profit motive, your property may be an investment property, or it may be business property if your management activity is more regular, frequent, and intensive than required for an investment. A written management plan is one of the best places to document a profit motive. For timber held as a business, you also must determine whether you materially participate in its operation, in order to establish whether you face restrictions (called passive loss restrictions) on the deduction of business losses. The tests for material participation are based on factors including the number of hours of your participation. • You grow timber for profit and asset appreciation but do not conduct it as a business. Your woodland is investment property for tax purposes. International Year of Forests, 2011 Timber Sales The net sale amount, not the gross proceeds from a sale, is taxed. You may deduct depletion and expenses from the sale. Report the sale of timber held as an investment on Schedule D, as a long-term capital gain if you owned the timber more than one year, or a short-term capital gain if not. Report the sale of timber held as a business on Form 4797 and Schedule D, whether you sold it outright (lump-sum) or pay-as-cut (sec. 631(b)). Example 1: You sold for $8,000 standing timber held as an investment more than one year and incurred $800 in sales expenses. Assuming your basis in the timber is zero, your net taxable amount from the sale is $7,200 ($8,000 – $800), which you report on Schedule D. If you held the timber as Linda Wang is a national timber tax specialist with the U.S. Department of Agriculture’s Forest Service, based in Washington, D.C. Tree Farmer NOVEMBER/DECEMBER 2010

Table of Contents for the Digital Edition of Tree Farmer - November/December 2010

Tree Farmer - November/December 2010
How to Develop an Investment Strategy
Buyer’s Guide & Resource Directory
Associations & Organizations
Communication – Satellite Phones & GPS
Consulting Foresters & Managers
Co-op Resources
Equipment Financing
Fertilizers, Herbicides & Repellents
Financing & Credit
Forest Appraisal, Analysis & Management
Forest Measuring Instruments & Software
GPS & Satellite Phones
Land Sales
Portable Sawmills
Pressure Treated Products
Real Estate Brokers
Seeds & Seedlings
Specialized Excavating for Erosion Control
Supplies, Gifts & Apparel
Timber Buyers & Loggers
Timber Pricing Services
Tools & Equipment
Trail Layout & Construction
Tree Paint & Markers
Tree Protectors & Shelters
Wood Manufacturers
Associations & Organizations
Cooperative, State Research, Education & Extension Services
Grant, Loan & Cost-Share Programs
Tree Farm State Contacts
State Foresters
Taxing Issues
Sharing Your Experiences
Ties to the Land
Sharing Your Experiences
Tools & Techniques

Tree Farmer - November/December 2010