tree farm tax deduction

[Polly]

i          is their any way land being used to grow marketable timber on being used for a tax deduction with uncle sam i know this might not be a topic for open discussion i was just wondering  8)

[Ron Wenrich]

Yes, there are tax deductions, but, I believe its at the time of harvest.  You can accrue your costs against your income at harvest time.  If you're looking at reducing your income tax by things you do on your forest on a yearly basis, I don't think its going to fly.

I'm sure someone will correct me if I'm wrong.

[Gary_C]

I believe Ron is right. You may be able to deduct some limited maintenance costs per year, but you would have to consult the very complicated rules for each type of deduction to know how they can be used to offset other income. Plus some things may need to be depreciated rather than be deducted. And this Alternative Minimum Tax (AMT) may kick in to limit your actual deductions.

There are many publications you can get for free from the IRS web site and if you can go to the Timber Tax website, www.timbertax.org and download Forest Landowner's Guide to the Federal Income Tax, Agriculture Handbook No. 718 plus there are links there for other IRS publications. I see they already have some information up on timbertax about new changes in the farm bill, but I have not had time to look at them.

[clearcut]

Taxation of timber land is complex and confusing. The single best piece of advice I can give is to KEEP GOOD RECORDS. Document every expense that you can with the date, purpose, amount (dollars, hours, miles etc.) Keep at least a simple notebook updated at the time the expense occurs. Save receipts. Write everything down and decide later which account to allocate the expenses to. Document mileage to and from the tree farm when maintaining the property. If you travel to a landowner training (like a timber tax workshop) note your miles and other travel expenses.

In general you should EXPENSE costs in the year that they occur. These are short term or annual maintenance expenses like grading a road surface, small hand tools, mileage to perform maintenance etc. Annual property taxes are usually expensed.

DEPRECIATE costs that have a predictable life like a culvert, gate, or fence. Large equipment is usually depreciated.

CAPITALIZE or add to the BASIS cost that improve the land or the trees. The land and trees are separate capital assets. The pioneering of a new road would be a permanent improvement and added to the Basis for the land. Some costs like pruning are allocated to the trees. You recover these costs from a tax standpoint when you sell the asset either the trees in a timber sale or the land.

Wherever you can - Expense, then Depreciate, then Capitalize. The cost of seedlings would be added to the basis but the mileage to pick them up at the nursery and deliver to the planting site  would be an Expense. Part of the cost of the truck if used in the "business" of the tree farm could be depreciated.

Where this all pays off is when you eventually sell timber. Many of these costs offset the sale proceeds for tax purposes. With timber you have a lot of costs that add up over time that tend to get forgotten. Then you get a large amount of money in a short time. You want to toss as much of the expense back at the IRS then thereby reducing your income. All this work also pays off in proving "material participation" and the business (vs. hobby) nature of your tree farm.

[Ron Scott]

Yes, but it depends upon your management intent of your timber property, whether its for "investment" or "hobby" as to how detuctions and how much may be scheduled and allowed.

The above references listed are good sources for timber tax information as well as your local Extension Service. An accountant skilled in timber taxes is also a great help.