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Business

The following types of expenses are covered here:

• Interest Expenses
• Labor Related Expenses
• Land Related Expense
• Expenses Associated with a Sale
• Taxes
• Tool & Equipment
• Travel Expenses
• Tree Planting Expenses
• Reporting Business Expenses

Interest Expenses

Interest payments which may be deductible include those on bank loans and other short-term credit, and long-term indebtedness such as mortgages. Interest charges of an accounting nature such as the implicit interest cost of the funds you have invested in the tree farm (owner's equity) are not deductible. Corporate taxpayers may deduct unlimited timber investment interest expense against income from any source.

For complete details see IRS Publication 550, Investment Income and Expenses

Reporting Interest Expenses - Business expenses are reported on the appropriate business form. For Sole Proprietorships this would be Schedule C. Partnerships and corporations report expenses on their returns. A farmer who has timber expenses would report them with other farm expenses on Schedule F.

Labor related Expenses

Salaries or other compensation for services actually rendered by others, such as hired labor, fees of consulting foresters, lawyers, accountants. etc., may be deductible in the year in which they were incurred provided these expenditures are not directly related to any activity such as timberland purchase, reforestation project, or timber sale.

If the expenses are related to a timberland purchase, reforestation project, or timber sale, they are capital expenses and must be allocated to the appropriate capital accounts. Payment for labor provided by family members who are not owners is deductible under certain circumstances, see IRS Pub. 225, Farmer's Tax Guide. The value of labor of an owner of a business is not deductible. An owner's labor is rewarded by the profits generated.

Reporting Labor Expenses - Business expenses are reported on the appropriate business form. For Sole Proprietorships this would be Schedule C. Partnerships and corporations report expenses on their returns. A farmer who has timber expenses would report them with other farm expenses on Schedule F.

Land Related Expenses

Maintaining good records - Records must be maintained which are adequate to allow you to properly calculate the tax due, and justify this determination if audited. Because timber assets are held for long periods of time it is necessary for you to keep records for a long time. You need to include sufficient detail to allow reconstruction of events many years after-the-fact. Keep your tree farm records as long as you own it plus 4 years after you sell it. In some cases it may be necessary to pass these records onto your heirs or those receiving the tree farm as a gift.

Complete and accurate records should be maintained for the land itself, depreciable land improvements, and non-depreciable (permanent) land improvements. These records will show your basis in each of these assets and aid you in determining allowable deductions.

For a more complete discussion on what types of records should be maintained and how to do so click here.

Expenses related to the land itself - At the time of purchase, the total purchase price is allocated between the assets included in the purchase. The proportion entered in the land account is the proportion of the total "acquisition cost" attributable to the bare land. The total basis allocated among the assets acquired for a lump sum is the acquisition cost. This is the purchase price plus other costs incurred to obtain title to the property. Other costs might include expenditures for timber cruising, appraisal, land survey, title search and insurance, recording fees, and legal fees.

For a more complete discussion on determining and calculating your basis in the various assets click here.

Recovery of land expenses - Land cannot be depreciated or depleted. Its value can only be recovered when it is disposed of by sale, gift, exchange or some other means.

Non-depreciable (permanent) land improvements - These are earthwork betterment's of a permanent character such as clearing, grading and ditching permanent roads; land leveling; and impoundment's.

Recovery of non-depreciable land improvement expenses - The recovery is the same as for the land itself. These types of expenses cannot be depreciated or depleted. Their value can only be recovered when the land is disposed of.

Depreciable land improvements - Improvements of this nature would include such things as bridges, culverts, gravel surfaces of roads, fences, firebreaks, and temporary roads.

Recovery of depreciable land improvements - Recovery of theses expenses is done through depreciation. For the specifics on how to calculate and take the depreciation deduction see IRS Publication 534.

Expenses Associated with a sale

All costs associated with a timber sale or other form of disposal are sale expenses. These expenses would include timber cruising, marking, scaling, fees of consultants (forester, tax, lawyer) and travel.

Reporting sale expenses - Sale expenses are added to the allowable basis of the stumpage sold or otherwise disposed of, and this total is then subtracted from the sale proceeds to determine the net gain or loss reported on Schedule D, Form 1040 for an investor. The same procedure applies to Form 4797, Sale of Business Property.

If you cut timber, to which an election to treat the cutting as a sale applies, the treatment of any costs incurred to mark or otherwise prepare the timber for cutting depends on your accounting procedures. If such costs are incidental to the overall management and operation of your timber business, they are generally deducted as an ordinary and necessary operating expense.

Taxes

Which Taxes are Deductible - Taxes attributable to your timber, which is held as part of a trade or business, are deductible in full each year against income from any source. This would include property taxes, yield, severance, sales, gasoline, and license fees for business vehicles.

If you prefer, you may elect to capitalize property taxes and recover them upon sale of the timber rather than deduct them in the year paid. This is done by electing to have the expense treated as a "carrying charge." Severance and yield taxes may not be capitalized and must be deducted in the year in which they are incurred.

Which Taxes are Not Deductible - Federal income tax, estate, inheritance and gift taxes, and special assessments for local benefits tending to increase the value of the property are not deductible.

Reporting Taxes - Tax expenses of a business are deducted from business income on a business tax schedule such as Schedule C or Schedule F, or the corporate or partnership forms.

Tool & equipment expenses

Recovery of expenses - Tools of short life (usually less than one year) or of small cost (less than $100.00) such as axes, handsaws, sledges, wedges etc., are deductible in the year in which the expense occurred provided the timberland is being held with the intention of making a profit.

Reporting Tool Expenses - Business expenses are reported on the appropriate business form. For Sole Proprietorships this would be schedule C. Partnerships and corporations report expenses on their returns. A farmer who has timber expenses would report them with the other farm expenses on Schedule F.

Equipment and building expenses - Assets placed in these accounts include durable equipment such as sawmills, trucks, tractors and power saws. Individual accounts should be established for each item or class of items.

As a general rule any item costing over $100.00 an having a useful life of over one year should be capitalized to the appropriate account.

The recovery of expenses associated with purchasing or repairing equipment and/or buildings is done through depreciation. For more specific information on how to calculate and report the depreciation deduction see IRS Publication 534, Depreciation. Incidental repairs of trucks, tractors and other mechanical equipment are deductible in the year in which they are incurred under authority of Section 162 of the Code.
The cost of any major repairs or reconstruction that materially increases the value or prolongs the life of an item is capitalized to the account for that item.

Sec. 179 Deduction Limits . Rather than depreciating tangible personal property purchased and placed in service during the year, Sec. 179 allows the cost to be deducted against business income, subject to a $125,000 per year limit, and a phase-out threshold for expenses totaling more than $500,000. This treatment applies to expenditures after Dec. 31, 2002 and before Jan. 1, 2011. (H.R. 2206, Small Business and Work Opportunity Tax Act of 2007 (SBWOTA)) The cost of living inflation adjustment will apply to the $125,000 and $500,000 amounts. For details see IRS Publication 534, Depreciation.

Travel Expenses

Travel expenses are the ordinary and necessary expenses incurred while traveling away from home on business. The purpose of your travel must be directly related to your tree farm business, and the trip must be "primarily" for business. If "primarily" for personal reasons, such as vacation, none of the costs are deductible. If primarily for business, but you also spend time engaged in non-business activities, all the transportation costs but only 50% of the meal expenses incurred while engaged in business activities are potentially deductible.

In making decisions about what expenses to deduct the key words are ordinary, necessary, reasonable in amount, and directly related to the production of income. "Directly related to income potential" generally means associated with an activity that results in increased timber production or quality, or output of other products.

Travel within one day - If your tree farm is close enough to your "tax home" that when working at the farm you drive back and forth each day, you are not allowed to deduct your travel costs.

Travel longer than one day - You can deduct travel costs if your work requires you to be away from your "tax home" substantially longer than an ordinary day's work and during your time off while away you need to get sleep or rest to be able to continue working the next day. In this instance you can deduct the costs for transportation, lodging, and meals.

Your tax home is your main place of business, regardless of where you maintain your family home. You are allowed to deduct your actual transportation costs, the cost of your car, and 50% of your actual meal expenses. Lodging expenses are deductible to the extent they aren't extravagant.

Absentee Tree Farmers - To justify travel costs you must be able to demonstrate a direct relationship between the activities carried out while at the tree farm and the farm's income potential. If your tree farm doesn't include the trappings of a second home site you have a strong prima facie case for arguing that there is no reason to go other than for business. If your tree farm is also a vacation retreat you should record how much time you spend doing what. In either case you're on solid ground if your management plan prescribes certain treatments and you travel to carry out a particular one. This assumes your management plan calls for treatments which increase the income potential of your tree farm.

Reporting Travel Expenses - Business expenses are reported on the appropriate business form. For Sole Proprietorships this would be Schedule C. Partnerships and corporations report expenses on their returns. A farmer who has timber expenses would report them with other farm expenses on Schedule F.

For a complete discussion of how to figure allowable travel deductions see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Tree planting Expenses

Please refer to Reforestation Expenses section for a complete discussion on the treatment of tree planting expenses.

Reporting Business Expenses

Business expenses are reported on the appropriate business form(s):

• Form 1040 Schedule C (Profit or Loss from Business)
• Form 1040 Schedule F (Profit or Loss from Farming)
• Form 1065 (Partnership Return)
• Form 1120 (Corporate Income Tax Return)
• Form 1120S (Income Tax Return for an S Corporation)