Timberland upkeep can help lower tax bills
RAYMOND, Miss. -- Private timberland owners spend countless hours caring for and maintaining their property, and many are unaware that this investment can help lower their tax bills.
One of the most overlooked timber activities that qualifies for a tax reduction is reforestation, said Curtis VanderSchaaf, forestry specialist with the Mississippi State University Extension Service.
“Many people don’t know that you can deduct the expenses you incur during reforestation practices, including costs for site preparation, seeds or seedlings, labor, tools and depreciation on equipment used,” VanderSchaaf said. “Depending on how the property is classified with the IRS, you can take advantage of the federal reforestation deduction and amortization provisions, and beyond that, landowners who qualify can take advantage of the Mississippi reforestation tax credit.”
Landowners who hold the property for commercial production of timber products can deduct up to $10,000 of expenses related to reforestation in the year incurred. If expenses exceed that yearly cap, landowners can amortize the remaining costs over 84 months. The deduction can be taken against other sources of income.
Landowners must declare one of three classifications with the Internal Revenue Service: investors, business owners or hobby owners.
However, all tax treatments vary based on the intentions and actions of the landowner.
“You want to make sure that when you declare your classification with the IRS that it is appropriate given your effort,” VanderSchaaf said. “Be sure that the classification you declare makes sense based on the time and money you invest in the property. If you declare as an investor or business owner, make sure you can prove to the IRS you have a profit motive and the amount of effort exerted to justify your selection.”
While all timber landowners can benefit from understanding the general tax provisions related to timber, those provisions are just that -- general.
“Everything related to taxes varies greatly from one individual to another, depending on each taxpayer’s facts and circumstances,” said Yanshu Li, an associate professor of forest economics and taxation at the University of Georgia. “These are just general rules. ‘It depends’ is the common answer to many tax questions.”
Both Li and VanderSchaaf recommend working with an accountant knowledgeable about timber taxes.
To benefit from any tax provisions, landowners must keep good records. The IRS does not require any certain recordkeeping system. A simple tree farm journal is a good way to keep track of activities, expenses and income related to timber.
When starting a journal, it is important to know the initial basis, or the cost of acquiring the timberland and the timber basis, or the value of the timber. Timber basis is important when timber is sold, sometimes years after the timberland is acquired, because this figure can be used to reduce the amount of sale income that is taxable.
“If landowners do not have records, it may be possible to hire a competent forester to help retroactively estimate the volume of the timber on the stand when the property was acquired and the timber price back then,” Li said.
Some other major preferential federal income tax provisions that landowners may overlook include long-term capital gains treatment of timber income, timber depletion (subtract timber basis from timber proceeds), deduction of qualified carrying charges and forest management expenses, and exclusion from income certain cost-share government payments, Li said.
Only the profit portion of timber sale proceeds is taxable. Timber owners can subtract the timber basis and any expenses related to the timber sale from the money received. Common selling expenses include sale administration and inventory fees charged by a forester, attorney fees, advertisement fees, as well as severance taxes paid by the timber owner.
Extension Publication 2307, “Timber Tax Overview,” includes more general information about timber taxes, keeping a tree farm journal and additional sources for timber tax information. Read it at https://bit.ly/3k1ihQC.
For a detailed explanation of how to set up and use a tree farm journal, read Extension Publication 2306, “Forestry Income Tax Series -- Setting Up the Books Using a Tree Farm Journal.” Read it at https://bit.ly/411umpE.
The U.S. Department of Agriculture Forest Service Southern Research Station publication, “Tax Tips for Forest Landowners: 2022 Tax Year,” provides an overview of general timber tax information. Read it at https://www.srs.fs.usda.gov/pubs/65581.