Tax Treatment of Timber
Very few sections of the Internal Revenue Code are written specifically for timber. This means there is a considerable amount of interpretation involved. This website was developed to be used by timberland owners, as well as a reference source for accountants, attorneys, consulting foresters and other professionals who work with timberland owners by answering specific questions regarding the tax treatment of timber related activities.
Recent Updates to the Site:
Getting Started, Recording Keeping - incorporates requirement for QTP"X" accounts to separately record expenses and acreage for qualified reforestation expenses deducted and/or amortized under Internal Revenue Code Sec. 194(a) and (b).
Publications -
Added the new edition of Estate planning for forest landowners: what will become of your timberland? by William C. Siegel; Haney, Harry L.; Greene, John L. 2009. Gen. Tech. Rep. SRS-112. Asheville, NC: U.S. Department of Agriculture Forest Service, Southern Research Station. 180 p. It provides guidelines and assistance to nonindustrial private forest owners and the legal, tax, financial, insurance, and forestry professionals who serve them on the application of estate planning techniques to forest properties. It presents a working knowledge of the Federal estate and gift tax law as of September 30, 2008, with particular focus on the unique characteristics of owning timber and forest land.
Added the new timber tax manual Timber Tax Management for Family Forest Owners, 2009, by William L. Hoover and Mark Koontz, Timber Tax LLC. A comprehensive treatment of income tax issues related to ownership of forest land with numerous examples, legal citations, and detailed annotations for Form T - Timber.
Added the article "Income Tax Deduction for Timber Casualty Loss," 2008. Dr. Linda Wang, Timber Tax Specialist, US Forest Service. Recent storms in the South has many landowners asking the questions on taking casualty loss deductions on downed trees in their timber property. Although the tax law allows a casualty loss deduction to the damaged timber, the amount of deduction may be small or even none in certain cases, to the surprise of these owners. The difference between the real economic loss and the tax loss can be large depending on the tax basis.
New Developments:
Form 1099-S Now Required for Lump-Sum Timber Sales
The IRS has issued Treasury Decision 9450. Information Reporting for Lum-Sum Timber Sales (IRB 2009-24), (Reg. §1.6045-4). Payments made for the purchase of an interest in standing timber for a lump-sum amount are to be reported to the IRS and the seller on IRS Form 1099-S, Proceeds From Real Estate Transactions. This requirement applies to sales of $600 or more, i.e. a total sale price of $600 or more regardless of the amount of individual payments if a transaction is settled by more than one payment. [Reg. §1.6045-4(c)(iii)]. Reporting is required for sales on and after May 28, 2009. Payments made to corporations are exempt from the reporting requirement. [Reg. §1.6045-4(d)(2)(i)] As under current law, contingent payments for timber, usually under pay-as-cut contracts, are reportable on Form 1099-S, effective January 1, 1991.
Principal Residence on Woodland
We have always advocated that woodland owners whose principal residence is located on their woodland should cleary demarcate on the ground and in their records where the yard stops and the woodland begins. This issue has been raised most frequently with regard to caslualty losses since the rules for shade trees and for timber differ. (See for example Bowers v. Commissioner, 42 T.C.M. 1659) The issue has come more recently in the context of the exclusion of gains on the sale of a principal residence, Code Sec. 1034 (prior law), (See for example James D. Schlicher v. Comm., TC Memo 1997-37). It may also come up under the recently enacted credit for first-time homebuyers, Code Sec. 36. We've had a report that a timber buyer has told a seller that the sale proceeds aren't taxable becuase the timber was sold off of residential property and therefor qualified for the exclusion provisions of Code Sec. 121. There is no basis for such treatment.
2008 Net Operating Loss Carryback
If you operate as a business that generated a net operating loss (NOL) in 2008 Rev. Proc. 2009-19 explained how to elect to carryback the NOL for 3, 4 or 5 years, not the usual 2 years. This was a provision in the 2009 Recovery Act. The Rev. Proc. caused confusion and the IRS is allowing additional time to make the election. Check with your tax advisor for additional information.
Estate and Gift Tax Legislation
The Chairman of the Senate Finance Committee, Max Baucus (D-Mont.), has announced legislation that would make permanent the current estate tax effective exclusion amount of $3.5 million. This and many other provisions are contained in S. 722 "The Taxpayer Certainity and Relief Act of 2009." The legislation would also index the excludable amount for inflation, reunify the estate and gift taxes, allow portability of the exemption for spouses, and increase the amount allowed under special use valuation to the amount of the estate tax exemption. Mr. ROCKEFELLER, and Mr. SCHUMER are cosponsors. (4/30/09) S. 722 has been referred to Senate Finance Committee. Hearings will be scheduled soon.
The American Recovery and Reinvestment Act of 2009 (Stimulus Bill), H.R. 1 (Revised 2/17/09)
Both theU.S. House and U.S. Senate have approved the conference agreement and the President is to sign H.R. 1 today, 2/27. Summaries of provisions are provided below.
Individual Tax Provisions - There are no tax provisions targetd directly at timberland owners, but many non-tax provisions that will impact indirectly, discussed in the section below. Selected tax provisions are briefly summarized here for general informtion.
Making Work Pay Credit - This is a credit against an employee's share of FICA tax for taxpayers with earned or self-employment income. Employer's share stays at 6.2 percent. The credit is capped at $400 ($800 for married couples) and will be taken as a reduction in withholding by employers. It is phased out for taxpayers with adjusted gross income exceeding $75,000 or $150,000 for married couples. The credit applies for calendar years 2009 and 2010.
$250 Economic Recovery Payment - These are one-time direct payments of $250 to individuals on Social Security, railroad retirees, and disabled veterans.
Alternative Miminum Tax "Patch" - Congress continued its year-to-year change to the AMT to avoid catching millions of middle income taxpayers with the AMT. The 2009 AMT exempt amounts are $70,950 for joint filers and $46,700 for single filers.
First-Time Homebuyer Tax Credit - First-time homebuyers of their residence get a tax credit of $8,000, an increase from last years $7,500. The higher credit applies to purchases after December 31, 2008. The credit phases out for AGI's above $75,000, $150,000 for joint filers. There is no pay-back of the credit if the residence is occupied for at least 36 months.
New Car Deduction - Provides an "above-the line deduction" of state and local sales taxers or excise taxes paid on the purchase of new vehicles. Thus, the deduction is available for those taxpayers not itemizing.
Education Credit - The HOPE education credit is incresed from $1,800 to $2,500 per year
Unemployment Compensation - Unemployment compensation is subject to income tax. The new law excludes up to $2,400 of such compensdation for 2009. Amounts over $2,400 remain taxable.
Business Tax Provisions -
Bonus Depreciation - The 50-percent first year bonus depreciation is extended retroactive to January 1, 2009.
Code Section 179 Expensing - The increased deduction of $250,000 allowed in 2008 is extended to 2009. The increased threshhold of $800,000 is also extended. If not extended the deduction in $2009 would have been $125,000 with a cap of $500,000.
Net Operating Loss (NOL) Carryback - Qualified small businesses with average gross receipts of $15 million or less get a five-year carryback. This means filing an amended return and potential receipt of a refund.
Work Opportunity Tax Credit - The existing categories of groups qualifying for this credit is expanded to include unemployed veterans and "disconnected youth."
Refundable Credits in Lieu of Bonus Depreciation - This provision provides a way for certain businesses to get a refund by monetizing accumulated AMT and R&D credits taken in lieu of bonus depreciation.
Cacellation of Indebtedness - The calcellation of a debt results in taxable income to business no longer having to payoff the debt. This provisions allows this recognization to be spread over 5 years.
Exclusion of Gain on Qualified Small Business Stock - Currently investors can exclude 50 percent of gain from the sale of qualified small business stock acquired and held for more than five years. The exclusion is increased to 75 percent for stock purchased after February 17, 2009 and before January 1, 2011. A small business is one with assets not over $50 million. The entity must conduct an active trade or business.
S Corporation Built-In Gain Period - This provision helps C Corporations not able to survive under C Corporation tax treaement by reducing the built-in gains subject to taxation upon converrsion. The holding period for assets subject to the built-in gains is reduced to seven years from 10 years. This applies to C Conrporations converting in tax years 2009 and 2010.
Estimated Tax Payments of Individuals Reliant on Income From Small Businesses - Such individuals are required to make quarterly estimated tax payments equal to 90 percent, instead of 100 percent, of the amount of tax paid in 2008.
Non-Tax Provisions - Perhaps the biggest in the long-term is the support for reseach and production of renewable energy. The trend was well underway already, but the new incentives will redfine the meaning of "fuelwood" and change timber management strategies in many forest regions. The many incentives provided to the housing sector should bring this market back a little faster than otherwise expected, reviving wood products markets. There is also an additional $650,000,000 for USDA, USFS for `Capital Improvement and Maintenance', , to remain available until September 30, 2010, which shall include remediation of abandoned mine sites and support costs necessary to carry out this work. Also included is an additional amount for `Wildland Fire Management', $485,000,000, to remain available until September 30, 2010, for hazardous fuels reduction and hazard mitigation activities in areas at high risk of catastrophic wildfire, of which $260,000,000 is available for work on State and private lands using all the authorities available to the Forest Service: Provided, That of the funds provided for State and private land fuels reduction activities, up to $50,000,000 may be used to make grants for the purpose of creating incentives for increased use of biomass from national forest lands. On the tax side the exclusion for the individual alternative minimum tax will increase slightly.There's also relief for the tax on built-in gains of S-corporations that transitioned from being a C-corporation. We'll provide more complete summaries when the language signed by the President is available.
Access to Data on IRS Valuations of Conservation Easements in Colorado (Posted 1/20/09)
The IRS continues to focus on abuse of charitable contributions of conservation easements. The primary issue in many cases is the value donors claim for their contribution. Colorado has been the focus of this issue because of the large number of donations made by land developers and intensive development pressure in the state. This led the IRS to develop a detailed valuation study of land and easements. Five IRS employees spend more than one year compiling, organizing, reviewing and analyzing the information that went in a “matrix” summarizing the data. Access to the complete matrix was a discovery issue in RCL Properties, Inc., [Federal District Court of Colorado, 2009-1 USTC 50,114; 102 AFTR 2d 2008-7302, 12/11/2008]. Discovery is the process that takes place before a case goes to trial whereby each party has access to each other’s information that is required to properly counter arguments made by the other side. In this case, the taxpayer, RLC Properties, Inc. wanted access to the complete matrix, not the summaries provided to them by the IRS. The taxpayer is a partnership and the IRS imposed a Final Partnership Administrative Adjustments (“FPAA”) based on the IRS’s valuation of the conservation easement donated. The court ruled that the taxpayer has the right to access the complete matrix since it is not based on information from individual taxpayer returns. The matrix may become part of the published trial record.
New Deadline for Copy B of Form 1099 (Posted 12/3/08)
The IRS announced that the date by which Copy B of Form 1099-S is to be received by the taxpayer to whom payments were made in 2008 has been changed. The instructions for the form give February 2, 2009 as the date. The correct date for 1099-S is February 17, 2009 because of the weekend and holiday rule. Otherwise the due date would be February 15. The change to February 15 was made by the Emergency Economic Stabilization Act of 2008. The due date for 1099-MISC remains February 2, 2009. A discussion of Form 1099 for payments for acquisitions of timber is at “The IRS Form 1099 Conundrum (Updated on 11/29/07 to reflect REG-155669-04 , Information Reporting for Lump-Sum Timber Sales, 11/28/2007)”
Sale of Conservation Easement on Farm Subject to Current Use Valuation Triggers Recapture (Posted 11/10/08)
If all the qualifications of IRC Sec. 2032A are met the value of real property for estate tax purposes can be determined based on the current use of the property, instead of the highest and best use. This is generally referred to as “current use valuation.” The property so valued must continue in a qualified use and be owned by a qualified heir. If the property is disposed of or is changed in use, the estate tax otherwise due because of the lower valuation must be paid.
Since special use valuation was originally enacted conservation easement programs have became active. The U. S. Congress amended the current use law to support the use of conservation easements by providing that a disposition “by gift or otherwise” of a qualified conservation contribution on real property subject to current use valuation election will not trigger the recapture. The Congressional intent of “by gift or otherwise” has been questioned, specifically does it include a sale of a conservation easement on real property subject to current use valuation.
Although private letter rulings issued by the IRS to a specific taxpayer cannot be cited as precedent, they are useful indicators of how the IRS approaches an issue. In Letter Ruling 200840018 (10/3/08) the IRS notified the taxpayer that the sale of a conservation easement on their farm would trigger the recapture of the estate tax saved by the lower valuation. A revenue ruling may eventually be published on this issue, or the law amended by Congress. But for now, it appears that only outright gifts of qualified conservation easements on land subject to current use valuation election will not trigger the recapture. Consult your tax counsel for additional information.
Estimated Inflation Adjustments for 2009 (Posted 10/30/08)
IRS has released inflation adjustments related to income, estate, and gift taxes (Revenue Procedure 2008-66): (1) The Annual gift tax exclusion increased from $12,000 to $13,000 in 2009; (2) the aggregate decrease in the value of qualified real property to which Special Use Valuation is applied (IRC Sec. 2032A) can't exceed $1.0 million, up from $960,000 in 2008; (3) the amount used to determine the 2% portion of estate tax payable in installments is $1.33 million in 2009, increased from 1.28 million; (4) the standard deduction for Married filing jointly is $11,400, Heads of households $8,350, Unmarried $5,700, and Married filing separately $5,700...|more|
IRS Releases Revised Estate and Gift Tax Publication (Posted 10/14/08)
A standard free source of essential estate and gift tax information is IRS Pub. 950 an Introduction to Estate and Gift Taxes. This new edition is must reading for anyone involved in updating their estate plan because of all the upcoming changes resulting from the scheduled elimination of the estate tax in 2010 and the change back to a $1.0 million exempt amount for deaths occurring in 2011 and thereafter. Until the recent market crash Congress was expected to pass legislation to put the exempt amount in the $3.0 to $4.0 million range. Congressional priorities have changed and new sources of revenue to fund the various bailouts will be a high priority.
Tax Tips for Forest Landowners for the 2008 Tax Year (posted 10/11/08)
Tax Tips for Forest Landowners for the 2008 Tax Year (Linda Wang & John L. Greene) (PDF) - Annual bulletin summarizing key federal income tax provisions related to owning and managing forest land. For previous years Tax Tips click here!
Taxing Issues:
How to Treat Carbon Sequestration Income (by Bill Hoover)
The compensation of tree farmers for the environmental services you provide is long overdue. The first major advance since conservation easements is payments for sequestering carbon, usually referred to as selling carbon credits. This is now possible in most regions of the United States. As with any new economic activity, existing contract and tax law applies until modified by legislation, the courts, and rulings of the IRS and state revenue agencies. The lack of definitive rules during the intervening years makes taxpayers uncomfortable...|continue|
Legislative Updates:
The Forest Landowners Tax Council (FLTC) is an independent, national non-profit organization dedicated to providing an effective and unified voice for non-industrial, private forest (NIPF) landowners on federal tax issues...| Current News|
If you are interested in current legislation that may have an impact on your timber activities click here!
Tax Workshops:
Looking to increase your knowledge in the tax treatment of timber, or just want to gain an understanding of the basics, check to see if there is a Timber Tax Workshop or Seminar available in your state...|more information|