Chapter 6 - Excise Taxes - Hardwood Timber Industry
OVERVIEW
For timber industry tax returns, the most common area of excise taxes applies to certain highway motor vehicles. A highway motor vehicle includes any self-propelled vehicle designed to carry a load over public highways, whether or not also designed to perform other functions. Treasury Regulations 48.4061(a)-l(d) (1).
A vehicle consists of a chassis, or a chassis and body, but does not include the load. It does not matter if the vehicle is designed to perform a highway transportation function for only a particular type of load, such as passengers, furnishings, personal effects, cargo, goods, supplies or material. It does not matter if machinery or equipment is specially designed and permanently mounted to perform some off-highway task unrelated to highway transportation. Examples of vehicles that are designed to carry a load over public highways include: buses, highway-type trucks, and truck tractors.
The following vehicles are generally not considered highway vehicles:
Specially designed mobile machinery for non-transportation functions. (Treasury Regulations 48.4061(a)-l(d) (2) (i).)
Vehicles designed for off-highway transportation. (Treasury Regulations 48.4061(a)-l(d) (2) (ii).)
Trailers and semi-trailers designed for non-transportation functions off the public highways. (Treasury Regs. 48.4061(a)-l(d) (2) (iii).)
A trailer or semi-trailer is not a highway vehicle if it is designed only as an enclosed stationary shelter for conducting a function at the off-highway site of construction, manufacturing, mining, processing, framing, drilling, timbering, or similar operations.
Only certain trucks and truck tractors are subject to excise tax. Treasury Regulations 48.4061(a)-l(b).
a. TRUCK - A truck is a motorized vehicle that usually carries cargo or special equipment on the same chassis as the motor.
b. TRUCK TRACTOR - A truck tractor usually does not carry cargo on the same chassis with the motor. It is used mainly to pull a trailer or semi-trailer.
A truck would NOT include a skidder, which is a four-wheeled machine used skid felled trees. In addition, a truck would not include a bulldozer. These vehicles do not on travel public highways.
The taxpayer is subject to the highway use tax if his truck or truck tractor meets ALL of the following tests: (Treasury Regs. 41.4481-1(a) (1)).
a. It is a highway motor vehicle, as discussed earlier.
b. It is required to be registered for highway use. The vehicle must either be registered or required to be registered under the law of any state, District of Columbia, Canada or Mexico in which the vehicle is used or located.
c. It is used on a public highway. The vehicle must be used on a public highway in the United States and be powered by its own motor. (Treasury Regulations 48.406I (a) -l(d)(t))
d. It has a taxable gross weight of at least 55,000 pounds. (Treasury Regulations 41.4481-1(a) (1) .)
The truck or truck tractor, together with any semi-trailer or trailer customarily used with it, must have a taxable gross weight of at least 55,000 pounds.
Generally, the taxable gross weight of the vehicle is the total of the unloaded weight of the vehicle and the weight of the maximum load usually carried on the vehicle. (Treasury Regulations 41.4482(b)-l(a).)
If any highway motor vehicle with a taxable gross weight of at least 55,000 pounds is registered, or required to be registered, the taxpayer must keep sufficient records for the IRS to decide whether he is liable for tax and, if so, the tax due. The taxpayer should keep the records for at least three years after the date the tax is due or paid, whichever is later. The following is a list of recommended records which the taxpayer should keep:
a. A description of the vehicle, e.g., serial number or other manufacturers number
b. The weight of loads carried by the vehicle in the same form as required by any state in which the vehicle is registered or required to be registered
c. The date of acquisition and the name and address from whom the vehicle was acquired.d. The first month of each tax period-in which a taxable use occurred and any prior month in which the vehicle was used in such tax period while registered, with proof that the prior use was not a taxable use.
e. The date of sale or other transfer of the vehicle and the name and address of the person to whom the vehicle was transferred. If it was not sold or transferred, the records must show how and when it was disposed of.
COMPUTATION - EXCISE TAX
The tax on highway motor vehicles is a graduated tax that is based on the taxable gross weight of the vehicle. The tax rates for a full year are: .(Treasury Regulations 41.4481-1(b) (2) & (c) (2)).
Taxable Gross Weight Rate of Tax At least 55,000 pounds but not over 75,000 pounds $100 a year plus $22 for each 1000 pounds (or fraction thereof in excess of 55,000 pounds) Over 75,000 pounds $550
The highway use tax is reduced by 25% for any highway motor vehicle if:
a. during the tax period, the vehicle is used exclusively to transport products harvested from a forest,
b. the products are transported to and from a point within the forest, and
c. it is registered as a highway motor vehicle used in the transportation of harvested forest products under the laws of the state in which the vehicle is, or is requires to be registered
Reference: Treasury Regulations 41.4483-6 & Internal Revenue Code Section 4483(e).
FILING FORM 2290
Every person in whose name a highway motor vehicle is registered at the time of its first taxable use in any tax period must file Form 2290, Heavy Vehicle Use Tax Return, and pay the tax.
Form 2290 must be filed by the last day of the month after the month the vehicle is first used on the public highways, even if the taxpayer is filing the return just to suspend the tax for his vehicles. The tax period runs from July 1 of the current year through June 30 of the next year. If any due date falls on a Saturday, Sunday or legal holiday, the due date is extended to the next succeeding day that is not a Saturday, Sunday or legal holiday.
For all vehicles owned and used in July, the due date is August 31. If the vehicle is first used in November, a tax return for it is due by December 31. File a single return for all vehicles first used in the same month.
File a separate Form 2290 for each month in which a taxable vehicle is first used during the tax period. If additional taxable vehicles are placed in use during a month in the tax period after filing Form 2290 for the other vehicle(s), file an additional Form 2290 for this vehicle. An additional vehicle may be one that was bought new or used, or one that was previously owned but just placed in service.
Example:
Mitchell's Logging has three trucks which it owns and has registered in the corporation's name. The state required that a specific gross weight be declared for each truck. The trucks are registered in only one state. The declared gross taxable weights in pounds were:
Truck A, Vehicle ID #1234567890 --- 90,000 pounds
Truck B, Vehicle ID #0987654321 --- 54,900 pounds
Truck C, Vehicle ID #1223344556 --- 60,000 pounds
All three trucks were used in July.
Mitchell's Logging reasonably estimates that Truck A will be driven less than 5,000 miles on public highways during the current tax period. During the last period, the tax on Truck A was suspended. The actual mileage drive on public highways was 4,555 miles in the last tax period. Mitchell's Logging fills in the Statement in Support of Suspension of Tax. On line 1, Mitchell's Logging lists the vehicle identification number of Truck A. Since the truck was listed that year as suspended, Mitchell's Logging also checks the box on line 2.
Truck B has a taxable gross weight of less than 55,000 pounds. Therefore, it is not subject to tax.
The tax on Truck C is $157.50.
Mitchell's Logging files the return August 30 and elects the installment privilege. With the Form 2290, Mitchell's Logging sends a check for $39.27. In November, Truck C was sold to another person. However, Mitchell's Logging will continue to make installment payments, since they are still responsible for the entire tax due.
FUEL TAX CREDITS AND REFUNDS
A taxpayer may be eligible to claim a credit or refund of excise tax included in the price of fuel purchased if the fuel was used in an off-highway business use. (Code Sections 4041(b) and 6421(a)). The business use may not be for a highway vehicle registered for use on any public highway'.
Generally, the following vehicles are not considered to be highway vehicles: (Treasury Regulations 48.406I(a)-l(d) (2) (i), (ii) and (iii)).
a. Specially designed mobile machinery for non-transportation functions
b. Vehicles designed for off-highway transportation
c. Trailers and semi-trailers designed for non-transportation functions off the public highways
Once again, skidders, bulldozers, road graders and trench diggers would be categorized as off highway business use vehicles.
In order to claim a credit or refund of excise taxes, the taxpayer must have a taxpayer identification number. The taxpayer may use his Social Security Number (SSN) or his Employer Identification Number (EIN). To apply for an SSN, the taxpayer must complete Form SS-5; to apply for an EIN, the taxpayer must complete Form SS-4.
The Internal Revenue Service requires that the following records be maintained by the taxpayer to enable the IRS to verify the amount claimed per Treasury Regulations 48.6421-1(f) :
a. Number of gallons purchased and used during the period of claims
b. Dates of purchase,
c. Names and addressed of suppliers with amounts of fuel purchased from each during the period of claims
d. Purpose of purchasing the fuel, and
e. Number of gallons purchased for each purpose
CLAIMING THE CREDIT
A taxpayer Claims the credit on Form 4136 and attaches it to his income tax return in the year the fuels were used. Generally, a taxpayer must amend his return by the later of three years from the date he filed the original return or within two years from the date he paid the tax. Treasury Regulations 48.6421-3(d) (1).
How to claim the credit:
Individuals Line 59 of Form 1040 for 1993.
Partnerships - Attach statement to Form 1065 detailing the number of gallons allocated to each partner and the applicable tax rate. Then, the credit is claimed on the partners' individual income tax returns.
Corporations - Line 32g of Form 1120
Line 28g of Form l120-A
S-Corporations - Line 23c of Form 1120S
CLAIMING THE REFUND
A taxpayer may also claim a refund rather than claim a credit when he files his income tax return. Beginning in 1994, a taxpayer files a claim for refund using Form 8849. Form 8849 replaces Form 843, which was used for tax years prior to 1994.
SIGNIFICANT AUDIT ISSUES
During the survey of the Timber and Logging Industry by both the Atlanta and Parkersburg Districts, significant audit issues have been determined to be as follows:
because it is a payment for merchandise under IRC Reg. 1.6041-3(d) . The payment to a contractor for a total amount that covers the purchase of timberland the service of cutting is also excludable from reporting as the payment of a bill for merchandise. Finally, the payment to an independent contractor for cutting timber is compensation for services performed, and payments of $600 or more must be reported as Non-Employee Compensation on Form 1099-MISC.a. Highway use tax - Taxpayers frequently fail to report the total number of trucks on Form 2290.
b. Highway Use tax - For vehicles wit dual use, part taxable and part non-taxable, auditors have frequently found false certification
c. Retail Truck - Excise Tax of 12% is due on the first retail sale of manufactured logging trucks.
SAW RENTS
It is common in the timber industry for employees to furnish and maintain their own saws and related equipment. Employers frequently reimburse their employees for the "rental" of the employee-owned saws and related equipment. Typically, the employer will treat a certain percentage of each employee's wages as a reimbursement. These reimbursement payments are customarily called "saw rental payments"; however, the payments usually do not represent a payment of rent made by the employer to the employee for the employer's use of the saw. Although the payment may be intended to reimburse the employee for the expenses incurred in purchasing and maintaining a saw, the amount is generally determined without reference to the expense that might be incurred. It is more likely that the reimbursements are used to provide employee compensation that is not subject to employment taxes. Employers do not include the reimbursements in the employees' wages. Consequently, the employers reduce their liability for employment taxes.
Internal Revenue Code Section 62(a) defines Adjusted Gross Income (AGI) as gross income minus certain deductions. These deductions are allowed without regard to whether or not the taxpayer itemizes; nor are the deductions subject to the 2% AGI floor.
Section 62(a) (2) (A) of the Internal Revenue Code allows an employee a deduction in computing adjusted gross income (an above-the-line deduction) for expenses paid by the employee, in connection with the performance of services as an employee, under a reimbursement o9 other expense allowance arrangement with the employer, i.e., an accountable plan.
The issue with respect to saw rents is whether employees who furnish and maintain their own saws and other equipment are reimbursed for such expenses under an accountable plan. This is because IRC section 62(c) provides that a nonaccountable plan will not be treated as a reimbursement or expense allowance arrangement for purposes of IRC section 62(a) (2) (A). Nonaccountable plans are those under which (1) the employee is not required to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or (2) the employee has the right to retain amounts in excess of the substantiated expenses covered under the arrangement.
Amounts received under a nonaccountable plan are included in the employee's gross income for the taxable year, must be reported to the employee on Form W-2, and are subject to withholding and payment of employment taxes. Expenses reimbursed under a nonaccountable plan, if deductible, are deductible by the employee only as a miscellaneous itemized deduction, subject to the 2 percent floor imposed by IRC section 67. However, if the expenses are determined to be personal, they are not deductible by the employee under any provision of the Internal Revenue Code.
The amounts reimbursed to employees for the rental of their own saws and other equipment will not qualify as received under an accountable plan unless three requirements are met. First, under section 1.62-2(d) of the Income Tax Regulations, the expenses for which the employer is making payment must be expenses that would qualify for a business expense deduction under IRC section 162. Second, the substantiation requirements of section 1.62-2(e) must be met. Third, under section 1.62-(f), the employee must be required to return, within a reasonable period of time, any amounts received in excess of those that have been substantiated.
If an arrangement meets all three of these requirements, section 1.62-2(c) (2) provides that all amounts paid under the arrangement are treated as paid under an accountable plan. Under section 1.62-2(c) (4), the amounts treated as paid under an accountable plan are excluded from the employee's gross income, are not required to be reported on the employee's Form W-2, and are exempt from the withholding and payment of employment taxes. Section !.62-2(c) (3) provides that if an arrangement does not satisfy one or more of the three requirements, all amounts paid under the arrangement are treated as paid under a nonaccountable plan.
Saw rental payments do not satisfy the accountable plan requirements for two reasons. First, the employer is making a payment for expenses that may not be incurred. This violates the requirement that the expenses for which the employer is making payment must be deductible under IRC section 162. Second, there is no substantiation required. Accordingly, the saw rental payments are paid under a nonaccountable plan.
Example:
Lyle's Logging hires employees to fell 10 tracts of timber during the month of June. The employees provide their own saws and miscellaneous equipment. Lyle pays his employees $10 for each tree felled; generally, fifty trees per day are felled. Lyle apportions the payments to his employees 75% as wages and 25% as saw rents. Lyle has no idea if the saw rents reasonably correspond with the anticipated expenses of saw rents. None of the employees are required to substantiate any business expenses. Lyle frequently pays cash allowances and relies on the expectation that the allowance will be used for bona fide business expenses. Lyle reported only the 75% wages paid on the employees' W-2s at the end of the year. No consideration was given to the 25% saw rents.
During the audit of this company, you determine that the employees were reimbursed for employee business expenses under a nonaccountable arrangement. Therefore, the total paid to the employees, wages and saw rents, is includable in income and reportable as wages subject to employment takes. Your Revenue Agent's Report reflects the employment taxes due.
In addition, you request RTVUEs of the employees' returns to determine if the total Paid by the employer to the employee was correctly reported. The employees are entitled to claim any unreimbursed employee business expenses only if they itemize subject to the 2% AGI floor.
SKIDDER RENTALS
A skidder is a four-wheeled machine which is used to move felled trees. A skidder is not driven on the road. New skidders cost approximately $100,000; used skidders, $25,000. Skidder Operators often own their own skidders and pay for the costs of operating and maintaining the skidders.
It is common in the timber industry to find skidder operators who provide their own skidders to perform services as employees. The employer generally pays the skidder operator a predetermined amount based on the number of logs hauled. Often, there is no written agreement between the employer and the skidder operator; the agreement is usually verbal. It is customary to find employers paying 60% of the amount paid to the skidder operators as "skidder rent." The balance or 40% of the amount paid represents wages. Of course, the employer does not subject the 60% skidder rent to any employment taxes. The employer may or may not report the skidder rental to the operator on a 1099-MISC.
Unlike the saw rent discussed earlier, skidder rental payments may not be a reimbursement for employee business expenses governed by IRC section 62. The rental paid to a skidder operator will be considered self-employment income to the skidder operator who is engaged in the trade or business of renting the skidder. Whether a skidder operator is engaged in a trade or business is a factual question and requires an examination of the facts in each case to determine whether the operator was engaged in the activity with continuity and regularity and with a primary motive for income or profit. If the operator is engaged in a trade or business, the operator does not have to report the skidder-rental as wages. The skidder operator must report the skidder-rental as self-employment income and subject to self-employment tax.
Whether the payment made to the skidder operator actually is the payment of rent is also an issue to consider with skidder rental payments. An analysis of the arrangement may reveal that the payments look more like a reimbursement for employee business expenses. In that case, the IRC section 62(c) analysis is appropriate.
Example:
Lyle's Logging hires a skidder operator to skid the felled trees from the I0 tracts of timber as in the previous example.
The skidder operator is to be paid $20,000. Of the $20,000, Lyle designates 60% or $12,000 as skidder rental, which he does not subject to any employment taxes or withholdings. Lyle's designates 40% or $8,000 as wages. Lyle gives the skidder operator a W-2 for $8,000 at the end of the year. As Lyle assumed the skidder operator was incorporated, he did not issue him a 1099.
During the audit, you verify that the skidder operator, who is not incorporated, correctly reported on Line 7 of Form 1040, the wages paid to him of $8,000. You also learn that the skidder operator reported the skidder rental of $12,000 on Schedule E. You inform the skidder, operator that the skidder rental is not rental income to be reported on Schedule E. Instead, the skidder rental is self-employment income subject to self-employment tax as the skidder operator was in the trade or business of renting the skidder. As a result, the skidder rental should have been reported on Schedule C, as the operator is not incorporated.
Your Revenue Agent's Report reveals self-employment tax due attributable to the misclassification of skidder rental as rental income rather than self-employment income. In addition, you advise Lyle's Logging that a 1099-MISC should have been issued to the skidder operator as the operator was not incorporated and his services exceeded $600 for the year.