The Forest Landowners Guide to the Federal Income Tax

Table of Contents

Chapter 1. Introduction
Purpose 1
New Information 1
Organization 1
Internal Revenue Service Review 1
Chapter 2. Tax Planning
Your Planning Team 3
Developing Integrated Plans 3
Financial and Forest Management Planning 3
Financial Aspects of Forest Management Planning 3
Forest Management and Estate Planning 4
Planning Implications 4
Tax Considerations When Acquiring Forest Land 5
Tax Considerations When Selling Timber 5
Chapter 3. General Tax Considerations
Types of Forest Ownership and Operation 7
Purpose for Holding Timber 7
Personal Use 7
Investment 7
Business 7
Types of Taxpayers 8
Structuring Your Timber Activities 8
Chapter 4. Cost Considerations
Capital Costs 9
Original and Adjusted Basis 9
Allocation of Original Basis 10
Establishment of Accounts 12
Reforestation Tax Incentives 13
Deduction 13
Amortization 15
Qualifications for Deduction and Amortization 15
Reporting Procedures 15
Depreciation and the IRC Section 179 Deduction 16
Depreciation Deduction 16
The IRC Section 179 Election 22
Disposition of Depreciated Property 25
Currently Deductible Costs: Operating Expenses and Carrying Charges 25
Carrying Charges 26
The Passive Loss Rules 26
Timber Held as Part of a Trade or Business in Which the Taxpayer Materially Participates 27
Timber Held as Part of a Trade or Business With No Material Participation 28
Timber Held as an Investment 28
Chapter 5. Income Considerations
Timber Sale Receipts 31
Determining the Amount of Gain or Loss 31
Sale of Standing Timber for a Lump Sum 37
IRC Section 631(b) Disposal of Standing Timber With an Economic Interest Retained or Lump Sum 38
IRC Section 631 (b) The Cutting of Standing Timber With an Election to Treat as a Sale 41
Government Program Payments 43
Qualifying Payments 44
Determining the Excludable Amount 47
Determining Income Realized 48
Including Cost-Share Payments in Gross Income 49
Recapture Provisions 49
IRS Form T (Timber) 49
Other Timber-Related Receipts 49
Information Returns 50
Chapter 6. Tax Implications of Voluntary Property Exchanges
Introduction 51
Nonrecognition Mandatory for Qualified Transactions 51
Properties Eligible for Like-Kind Exchange Treatment 51
Exchange of Real Property for Real Property 52
The Meaning of Investment and Trade or Business 52
Change in Use 52
Time Considerations 52
Multi-Party Exchanges 52
Assumption of Liabilities 52
Exchanges Between Related Parties 53
Basis After a Nontaxable Exchange 53
Application to Timber Properties 53
Reporting of Like-Kind Exchanges 53
Chapter 7. Deductible Losses: Casualties, Thefts, Condemnations, and Noncasualty Losses
Losses to Timber or Forest Land 55
Form of Ownership 55
Deductible and Nondeductible Losses 55
Deductible Portion of a Loss 55
Type of Deduction and How To Report It 55
Casualty 56
Definition 56
Calculating Your Loss From a Casualty 56
Deducting a Loss From a Casualty 58
Theft Loss 59
Definition 59
Differences From a Casualty 59
Calculating Your Loss From a Theft 59
Deducting a Theft Loss 59
Condemnation 60
Definition 60
Differences From a Casualty 60
Calculating Your Loss From a Condemnation 60
Amounts Not Included in a Condemnation Award 60
Deducting a Condemnation Loss 61
Noncasualty Loss 61
Definition 61
Differences From a Casualty 62
Calculating a Noncasualty Loss 62
Deducting a Noncasualty Loss 62
Treatment of Expenses 62
Casualty or Theft Loss 62
Condemnation 62
Noncasualty Loss 62
Treatment of Gain 63
Postponing Recognition of a Gain 63
Reporting a Gain 64
Chapter 8. Tax Implications of Forest Stewardship
Treatment of Management Expenses Keyed to Production of Income 67
Capital Costs Recovered When Property Is Sold or Subject to Casualty Loss 67
Capital Gains Treatment Applies 67
Estate Planning 67
Conservation Easements 68
Qualifications for Charitable Deduction of Conservation Easements 68
Valuation of Donation 68
Estate Tax Exclusion for Land Subject to a Qualified Conservation Easement 69
Chapter 9. Other Tax Considerations
Installment Sales 71
Introduction 71
Sale Price 71
Basis 72
Gross Gain 72
Sales to Related Parties 72
Reporting Installment Sales 72
Electing Out 72
Alternative Minimum Tax 73
Potential Liability for the AMT 73
Alternative Minimum Taxable Income 73
Self-Employment Social Security Tax 74
Treatment of Spouses 74
Excluded Income 75
Other Considerations 75
How to Calculate Self-Employment Tax 75
Including timber Gains in Self-Employment Income to Guarantee Benefits 75
Employment Status 76
Employee Status Determination 76
The 20 Factor Test 76
Obtaining an IRS Ruling 77
Information Return Requirements 77
Chapter 10. Christmas Tree Production
General Considerations 79
Treatment of Costs 79
Establishment Costs 79
Operating Expenses and Carrying Charges 79
Uniform Capitalization Rules 79
Treatment of Income 80
Christmas Tree Sales Income 80
Choose and Cut Operations 81
Chapter 11. Taxation of Nontimber Forest Products
Products Taxed as Ordinary Income 83
Byproducts From Timber Harvests 83
Fee Activities and Leases 83
Products From Trees 83
Living Trees 83
Products From Wild Forest Plants 83
Products From Cultivated Forest Plants 83
Products Taxed as a Capital Gain 83
Qualifying Income From Tree Stumps and Long-Term Contracts 83
Qualifying Income From Cultivated Forest Perennials 84
Reporting Expenses and Income From Nontimber Forest Products 84
Chapter 12. Forms of Forest Land Ownership and Business Organization
Basic Ownership Considerations 85
Sole Ownership 85
Co-Ownership 85
Life Estates 85
Community Property 85
Business Management Organization 86
Partnerships 86
Limited Partnerships 86
Corporations 86
Subchapter S Corporations 87
Limited Liability Companies 87
Other Tax Entities 87
Chapter 13. Researching a Tax Question and Appeals Procedures
Statutory Law 89
Administrative Law 89
Revenue Rulings 89
Revenue Procedures 90
General Counsel Memoranda 90
News Releases, Notices, and Announcements 90
Private Letter Rulings 90
Technical Advice Memoranda 90
Case Law 90
Federal Court System 91
Interpreting Case Law 91
Audits and Appeals 92
How Returns Are Selected for Examination 92
The Examination Process 92
Appeals Within the IRS 93
Appeals to the Courts 93
Claims for Refund 94
Additional Information 94
Integrated Example of Tax Research 94
Chapter 14. Sources of Tax Assistance
IRS Publications 97
Commercial Tax Services 98
The Internet 98
Tax Preparation Software and Electronic Filing 98
Tracking Current Developments 98
Chapter 15. Forest Records
Management Information 101
Accounting Methods 101
Cash Accounting 101
Accrual Accounting 101
Recordkeeping Systems 102
Shoe Box 102
A Forest Landowner's Journal 102
A Forest Landowner's Journal with Accounts 104
Ledger Accounts 104
Capital Accounts 104
Expense Accounts 106
Capital Income Accounts 106
Ordinary Income Accounts 106
General Business Accounts 106
A Comprehensive Example of Forest Land Purchases and Management 107
Records for Forest Land Purchases 107
Records for Forest Land Management 109
Glossary 111
Appendix A. Summaries of Selected Revenue Rulings
Basis and Depletion Allowance 125
Capital Gains 126
Cost-Sharing Payments 128
Like-Kind Exchanges 129
Involuntary Conversions 129
Appendix B. IRS Form T (Timber): Forest Activities Schedule 131
Appendix C. Instructions for IRS Form T (Timber) 135
Appendix D. Annotations for IRS Form T (Timber) 139
Entries on IRS Form T 139
Identification 139
Part I. Acquisitions 139
Part II. Timber Depletion 141
Part III. Profit or Loss From Land and Timber Sales (see instructions) 144
Part IV. Reforestation and Timber Stand Activities (see instructions) 145
Part V. Land Ownership 146
Index 147