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Business Structures

Active Timber Production Business

Timberland is titled to the business (individual owner if sole proprietorship, partners if a partnership, or corporation if incorporated). Owners are "materially participating" in the business under the passive activity loss rules. Costs are reported on the appropriate business tax form. Timber is generally, but not always, held primarily for sale to customers in the ordinary course of the timber production business. Gains from the disposals of timber on the stump qualify for capital gains treatment if he disposals meet the requirements of Section 631(b), disposal with an economic interest retained, of the Internal Revenue Code. Occasional sales of stumpage to outsiders may qualify for capital gains treatment under Section 1231. If the age structure of the timber has not allowed many previous timber sales, the timber may be considered as being held for use in a trade or business, but not primarily for sale.

Because of the need for the owner to be personally involved in the activity, tree farming inherently has the characteristics of a business, at least in comparison to financial investments such as stock and bonds. Most small tree farmers, however, do not have the regularity of incomes and other transactions generally associated with carrying on a trade or business. A business is an activity which is carried out on a regular basis for the production of income. A factor frequently cited by the courts is the holding out of the activity to the public as a trade or business, usually for the sale of goods or services.

Passive Timber Production Business

The treatment is the same as for an active timber production business, except the deductibility of operating losses is restricted by the passive activity loss rules.

Timber Production and Utilization Business

Same as active timber production business, except that timber is produced primarily for utilization by the business, not for outside sale. Any gain on timber cut for use in the business qualifies for capital gains treatment if the requirements of Section 631(a), election to treat cutting as a sale, are met and 631(a) treatment is elected. occasional sales of stumpage to outsiders may qualify for capital gains treatment under Section 1231, but Section 631(b), disposal with an economic interest retained, is generally used to assure such treatment.