The Forest Landowners Guide to the Federal Income Tax

Table of Contents

Chapter 1. Introduction
Purpose 1
New Information 1
Internal Revenue Service Review 2
Chapter 2. Timber Investment Considerations
Characteristic of a Timber Investment 3
Risk 3
Investment Expenditures 4
Land 4
Merchantable Timber 4
Operating and Management Expenses 5
Investment Revenues 5
Timber Sales 5
Hunting Leases 5
Miscellaneous Revenues 5
Economic Considerations 5
General Economic Trends 6
Economic Decision Criteria 6
Net Present Value (NPV) 6
Benefit/Cost Ratio (B/C) 6
Internal Rate of Return (IRR) 7
Equal Annual Equivalent (EAE) 7
Timeline 7
A Forest Investment Example 8
Summary 11
Chapter 3. Tax Planning
The Planning Team 13
Developing Integrated Plans 13
Introduction 13
Advantage of Timber Investments 13
Estate Planning Role 14
Planning Implications 14
Substantial Initial Investment 14
Long Preproductive Period 16
Tax Considerations When Forest Land Is Acquired 16
Tax Considerations When Selling Timber 16
Chapter 4. General Tax Considerations
Types of Forest Ownership and Operation 17
Purpose for Holding Timber 17
Personal Use 17
Investment 17
Business 17
Active Business Interest 17
Passive Interest 17
Types of Taxpayers 18
Structuring Your Timber Activities 18
Chapter 5. Cost Considerations
Capital Costs 21
Original and Adjusted Basis 21
Purchased Assets 21
Inherited Assets 21
Assets Received by Gift 22
Other Types of Acquisition 22
Allocation of Original Basis 22
Establishment of Accounts 23
Land Account 23
Depreciable Land Improvement Account 23
Timber Accounts 25
Equipment Accounts 26
Reforestation Tax Incentives 26
Amortization 28
The Tax Credit 29
Depreciation and the Section 179 Deduction 29
Depreciation Deduction 29
Section 179 Deduction 35
Disposition of Depreciated Property 38
Operating Expenses and Carrying Charges 38
Carrying Charges 39
The Passive Loss Rules 40
Timber Held as Part of a Trade or Business in Which the Taxpayer Materially Participates 40
Material Participation 40
Retired or Disabled Owners and Their Surviving Spouses 41
Reporting Expenses 41
Timber Held as Part of a Trade or Business in Which You Do Not Materially Participate 41
Timber Held as an Investment 42
Management Costs 42
Taxes 42
Interest 42
Reporting Expenses 43
Chapter 6. Income Considerations
Timber Sale Receipts 45
Determining the Amount of Gain or Loss 45
Costs of Sale 45
Adjusted Basis 45
How To Recover Your Basis 45
Recovery of Basis - Disposal of Standing Timber 46
Recovery of Basis - Cutting of Standing Timber 46
Determining the Kind of Gain or Loss 50
Capital Gain Status is Important 51
Capital Gains from Timber Transactions 51
Sale of Standing Timber for a Lump Sum 52
Disposal of Standing Timber With an Economic Interest Retained (Section 631(b)) 53
The Cutting of Standing Timber With an Election to Treat the Cutting as a Sale (Section 631(a)) 55
Government Program Payments 58
Qualifying Payments 58
Determining the Excludable Amount 59
Including Cost-Share Payments in Gross Income 60
Recapture Provisions 61
Other Timber-Related Receipts 61
Information Returns 61
Chapter 7. Tax Implications of Property Exchanges
Introduction 63
Nonrecognition Mandatory for Qualified Transactions 63
Properties Eligible for Like-Kind Exchange Treatment 63
Exchange of Real Property for Real Property 64
The Meaning of Investment and Trade or Business 64
Change in Use 64
Time Considerations 64
Multi-Party Exchanges 64
Assumption of Liabilities 65
Exchanges Between Related Parties 65
Basis After a Nontaxable Exchange 65
Application to Timber Properties 65
Reporting Like-Kind Exchanges 66
Chapter 8. Casualties, Thefts, and Condemnations
Discussion Limited to "Timber" 67
Normal Losses Not Deductible 67
Noncasualty Losses 67
Casualty Losses 67
Disease or Insect Infection 68
Drought Loss 68
Combinations of Factors 68
Salvage Requirement 68
Determining the Amount of Deductible Loss 68
Determining Volume of Timber 69
Determining Basis of Timber Destroyed 69
Year of Deduction 69
Destruction of Unmerchantable Timber 70
Buildings and Equipment 70
Determining the Decrease in Fair Market Value 70
Theft Losses 71
Year Deducted 71
Reduce Theft Losses by Anticipated Recovery 71
Multiple Damages 71
Condemnations 71
Condemnations for Right-of-Way Easements 71
Basis for Figuring Gain or Loss 72
Recovery of Expenses 72
Casualties and Thefts 72
Condemnations 72
Postponing Gains from Involuntary Conversions 72
Determining the Gain 73
Requirements to Postpone Gain 73
Basis of Replacement Property 73
Reporting Gains and Losses From Casualties, Thefts, Condemnations, and Noncasualty Losses 73
Casualties and Thefts 73
Reporting Gain or Loss - Property Held for 1 Year or Less 74
Reporting Gain or Loss - Property Held for More than 1 Year 74
Reporting Gain or Loss From Income Producing Property 74
Condemnations 74
Property Held for 1 Year or Less 74
Business or Investment Property Held for More Than 1 Year 74
Property Held Primarily for Sale 74
Property Held for Personal Use 74
Noncasualty Losses 74
Chapter 9. Tax Implications for Forest Ownership
Introduction 79
Tax Law Keyed to Production of Income 79
Conservation Easements 79
Qualifications for Charitable Deduction of Conservation Easements 80
Qualified Organization 80
Conservation Purpose 80
Qualified Real Property Interest 80
Valuation of Donation 80
Estate Gift Tax Exclusion for Land Subject to a Qualified Conservation Easement 81
Chapter 10. Other Tax Considerations
Installment Sales 83
Introduction 83
Calculating Installment Sale Income 83
Gross Profit Percentage 83
Selling Price 84
Adjusted Allowable Basis 84
Payments 84
Escrow Accounts 84
Electing Out 84
Unstated Interest and Imputed Interest 85
Reporting Installment Sales 85
Sales to Related Parties 85
Alternative Minimum Tax for Individuals 85
Alternative Minimum Tax Calculation 86
Self-Employment, Social Security Tax 86
Treatment of Spouses 87
Excluded Income Items 87
Christmas Tree Growers 87
Other Forest Products 87
Cost-Share Payments 88
How to Calculate Self-Employment Tax 88
Including timber Gains in Self-Employment Income to Guarantee Benefits 88
Employment Status 89
Behavioral Control 89
Financial Control 89
Type of Relationship 90
Chapter 11. Christmas Tree Production
General Considerations 91
Treatment of Costs 91
Establishment Costs 91
Operating Expenses and Carrying Charges 91
Uniform Capitalization Rules 91
Treatment of Income 92
Christmas Tree Sales Income 92
Section 1221 92
Section 631(b) 92
Section 631(a) 92
Choose and Cut Operations 94
Chapter 12. Form of Forest Landownership and Business Organization
Basic Ownership Considerations 95
Sole Ownership 95
Co-Ownership 95
Tenancy in Common 95
Joint Tenancy 95
Tenancy by the Entirety 95
Life Estates 95
Community Property 95
Business Management Organization 96
Partnerships 96
Unlimited Liability 96
Minors as Partners 96
Partnership Taxation 96
Limited Partnerships 96
Corporations 96
Corporate Taxation 97
Subchapter S Corporations 97
Tax Considerations 97
Limited Liability Companies 97
Income Tax Features 97
Other Tax Entities 97
Chapter 13. Researching a Tax Question and Appeals Procedures
Statutory Law 990
Administrative Law 990
Revenue Rulings 100
Revenue Procedures 100
Chief Counsel's Memoranda 100
News Releases, Notices, and Announcements 100
Private Letter Rulings 100
Technical Advice Memoranda 100
Case Law 100
Federal Court System 101
Tax Court 101
District Court and Claims Court 101
Circuit Court of Appeals 101
U.S. Supreme Court 102
Interpreting Case Law 102
Audits and Appeals 102
How Returns Are Selected for Examination 102
The Examination Process 103
If You Agree 103
If You Do Not Agree 103
How to Stop Interest from Accruing 103
Appeals Within the IRS 104
Appeals to the Courts 104
Claims for Refund 104
Additional Information 105
Integrated Example of Tax Research 105
Chapter 14. Sources of Tax Assistance
IRS Publications 107
Commercial Tax Services 108
The Internet 108
Current Developments 108
Guidebooks 109
Chapter 15. Forest Records
Tax Purposes for Forest Landowners 111
Management Information 111
Accounting Methods 111
Cash Basis Method 111
Accrual Basis Method 111
Recordkeeping Systems 112
Shoe Box 112
A Forest Landowner's Journal 112
A Forest Landowner's Journal with Accounts 112
Accounts 112
Capital Accounts 112
Land Account 112
Timber Account 113
Young-growth Subaccount 113
Plantation Subaccount 113
Amortization of Reforestation 113
Depreciation Accounts 113
Expense Accounts 113
Capital Income Accounts 113
Ordinary Income Accounts 114
General Business Accounts 114
A Comprehensive Example of Forest Land Purchases and Management 114
Records for Forest Land Purchases 114
Records for Forest Land Management 115
Glossary 125
Appendix 1. Summaries of Selected Revenue Rulings
Basis and Depletion Allowance 139
Capital Gains 140
Like-Kind Exchanges 143
Involuntary Conversions 143
Appendix 2. IRS Form T (Timber)
Index 153