Tree Farmer - Spring 2012 - (Page 44)

How to Determine your By Wang linDA Classification • Does the taxpayer or his or her advisors have the knowledge needed to carry on the activity as a successful business? • Has the taxpayer made a profit in similar activities in the past? • Does the activity make a profit in some years? • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity? berland. The determination between investment and business property is based on specific facts and circumstances of your property. In general, a business engages in timber-production activities on a more regular basis than does an investment. Woodland’s Tax taxing issues 44 Your woodlands may be taxed under one of the three classifications: a personal property, investment (income-producing) property, or business property. Here we answer some of the questions surrounding the classification system. What determines the woodland’s classification? Whether your woodland property is a personal, investment, or business property depends on your purpose in owning the property and your use and activities on it. Property not used to produce income is classified as being held for personal use. If your primary purpose for owning the property is personal enjoyment, such as hunting and fishing, it would be classified as personal property. In this case, you do not intend to sell timber for profit. Timber owned primarily for making profit may be classified as either an investment or business property. Profit motives are required for both of these classifications. What is the IRS presumption of a “for-profit” activity? The IRS presumes that an activity is carried on for profit if there is a profit during at least three of the last five tax years, including the current year. Because of the long production cycle and only periodic income from a timber property, failure to meet this presumption does not mean an automatic disqualification. One factor in the “for-profit” consideration, according to the IRS, concerns “the expectation to make a profit in the future from the appreciation of asset.” This is particularly relevant to woodland property, as timber generally appreciates over time from physical growth and enhanced quality. Is it a business or hobby? A business status may be denied and reclassified as “hobby” if it fails the “for-profit” requirement. Losses that are deductible for a business may be denied for a hobby activity. To determine whether an activity is engaged to make profits, the IRS lists the following factors for taxpayers to consider: • Does the time and effort put into the activity indicate an intention to make a profit? • Does the taxpayer depend on income from the activity? • If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the startup phase of the business? • Has the taxpayer changed methods of operation to improve profitability? What distinguishes an investment property from a business property? Both investment and business property classifications for your timber require a clear demonstration of “for-profit” motives from growing, cultivating, and selling timber or tim- 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 SPRING 2012

Table of Contents for the Digital Edition of Tree Farmer - Spring 2012

Tree Farmer - Spring 2012
From the President
Take the Measure of Your Woodland
Tree Farm & Politics
Pay Dirt
Thriving on Challenge
Beyond Bug Spray
Transforming Cropland into Tranquil Woodlands
Ties to the Land
Woodland Security
Wildlife Matters
Taxing Issues

Tree Farmer - Spring 2012