• Home
• Federal Income Taxes
  • Timberland Acquisition
  • Structuring Ownership
  • Timberland Appraisal
  • Determine Your Basis
  • Record Keeping
  • Management & Operating Expenses
  • Reforestation Expenses
  • Cost-Share Payments
  • Depreciation
  • Casualty Losses
  • Timber Sales & Income
  • Conservation Easements
  • Christmas Trees
  • Exchanges
  • Form T
  • Electronic Filing
• State Tax Laws
• Estate Planning
• Publications
• Professional Research
• Tax Workshops/Education
• Tax Policy
• Links

Tree Farm Incidental to Other Non-timber Business

This structure offers the advantage that the tree farm expenses are merged with the expenses of the business with which it is associated, helping to meet the material participation test under the passive loss rules. It also avoids the need for a separate accounting for the profitability of the tree farm activity. Another advantage is that since the timber is not held for use in the main trade or business, nor primarily for sale if few sales are made, it receives capital gains treatment on lump sum sales.

These advantages are premised on the assumption that the tree farm is such an incidental part of the larger business, that it is literally lost in the workings of the non-timber business, and the IRS is not likely to require that it be treated as a separate activity for tax purposes.

Regulations for both the hobby loss rules, Section 183, and the passive activity restrictions, Section 469, contain guidelines on how to determine what constitutes separate activities.

Activity Incidental to Farm Business - The timberland is titled with the other farm business property. Deductible timber expenses are reported on Form 1040, Schedule F, if operated as a sole proprietorship. If the farmer is not holding timber primarily for sale to customers in the ordinary course of a timber business, the timber is considered a capital asset. If sold on the stump the gain (loss) qualifies for capital gains treatment, reported on Schedule D, Form 1040. If the farm business is a partnership or corporation, the timber related expenses and income are reported on the appropriate business tax form. The passive loss restrictions apply to the farm as a whole.

Technical Note - Are tree farmers "farmers" if the only crop they produce is timber? Most IRS employees would say they are and in fact many tree farmers use Schedule F (Farming), Form 1040. If you are doing so there is no reason to change. The IRS has no official position on this point. The term "farm" (farming) is defined many places in the Code, but only within the context of the particular section to which the term applies. In general, a farmer is someone receiving farm income and farm income is defined by most sections of the Code as being from the sale of agricultural commodities (grain, fruit, vegetables, etc.) or livestock.

Activity Incidental to Non-farm Business - Timberland is titled with other business property. Costs are reported on the business tax return. Treatment of income is the same as for a farm business. The passive loss restrictions apply to the overall business.