Reducing federal income tax liability from timber sales
Forestry experts outline some of the basic tax provisions for income generated from selling timber and point readers to additional on-line forestry taxation resources.
Over the next several weeks, IRS Tax Guides, W-2 forms, 1099 forms and more will be mailed to taxpayers as they begin to collect the needed information to file their taxes for the 2012 year. And, as this year’s April 15 deadline for filing approaches, many taxpayers will also be looking for ways to reduce their taxes when they fill out tax forms. This includes private forest landowners who sold timber from their woodlands during 2012 calendar year.
Timber sales from a woodland harvest can produce significant income for a private landowner – especially if that sale involved high quality hardwoods. However, many landowners don’t realize that they owe income tax on any revenue they receive from a timber sale. In addition, many people are unsure of how to report that income to the federal government.
Forestry experts at Michigan State University Extension explain that there are legitimate ways for individual taxpayers to minimize their tax liability when it involves selling timber. For starters, income from timber sales can be classified as a long-term capital gain under most conditions and should be reported on Schedule D, Form 1040. Generally, landowners that have owned their timber for more than one year and meet certain other conditions can qualify. Currently long term capital gains are only taxed at 0 percent and 15 percent, depending upon a taxpayer’s income bracket. For some categories of taxpayers, reporting timber as ordinary income (versus long term capital gain) would cause them to pay more income tax than is necessary.
In addition, since most landowners only sell a portion of their timber at one time, they can deduct the original cost or ‘basis’ of their timber from the value of that sale. This is called a `depletion allowance’ and is reported on IRS Form T.
It’s very important for landowners to separate the value of their timber (called the basis) from the value of the land when they purchase the property, if they want to take advantage of this provision. For a fee, professional consulting foresters can help landowners with this process if they do not know what the value of their timber was at the time of purchase. But the longer the property has been owned, the less tax advantage there is to determining the basis after-the fact.
Landowners can also deduct their expenses that were directly related to their timber sale from the amount they receive, before figuring their tax. Examples of these expenses are fees paid for a consulting forester, surveying to determine sale boundaries and costs for advertising the sale. This is another way to legitimately minimize tax liability.
Woodland owners should consult a tax preparer or tax attorney for assistance, especially if this is their first timber harvest. Since these tax laws can be confusing, professional assistance can help you keep more of the money from your timber sale. However, since the tax treatment of timber is a relatively obscure portion of the tax code, be sure the tax preparer or attorney is knowledgeable.
For more information on the tax treatment of timber sale income, the USDA Forest Service publishes an annual fact sheet on timber taxation called “Tax Tips for Forest Landowners for the 2012 Tax Year”. Another useful publication that is also available from the United States Department of Agriculture Forest Service is the “Federal Income Tax on Timber: A Key to Your Most Frequently Asked Questions”. For in-depth information on forest taxation, several forestry-oriented governmental, university and non-government organizations maintain a website and an extensive database called the “National Timber Tax Website”. All of these resources are available for free and can be used by individual taxpayers as well as tax professionals seeking more information on the subject of forest taxation.