With a new administration, the chance of a tax code overhaul is becoming more of a reality. For woodlot owners, the process of filing taxes – no matter who’s in the White House – is always a confusing task to handle. However, when carefully thought out, it can be a manageable process.
“For most of us, the legal internal revenue code for income taxes and how it affects your woodlot management is not that complicated, believe it or not,” said Hugh Canham, professor emeritus, SUNY College of Environmental Science and Forestry during his session, “Woodlot Management and Income Taxes” at the New York Farm Show last February.
Here’s a summary of some tax tips when filing this month:
Use a forester
Private foresters are used for a variety of reasons for tree farmers. Arguably, a professional forester is worth their weight in gold come tax season. One point of contention for a forester to help you settle is determining basis.
Basis is the amount of investment in the timber asset to the owner. Specifically, for purchased property, the timber basis is the amount you paid for it. For inherited property, the basis of timber is its fair market value on the decedent’s date of death. There are also circumstances if the property was gifted or exchanged. A forester will help you discuss the advantages and drawbacks of establishing a basis in any case.
Have a management plan
It’s very important to have a management plan for your woodland for tax purposes, especially if you treat your property as an investment or a business.
“You need to have something written down that says: ‘This is what I own; this is the map of the property; here’s what I want to do with it; and here’s the reason why,'” Canham said. “It’s best to get a forester to work that out for you.”
Read more: Tax Season 101: What You Need to Know
For the budding hobbyist, it is also important to draw the line between personal use, an investment and business for your woodlot.
“There can be a mix of reasons, but you have to further demonstrate by your actions, particularly for the investment and business use,” Canham warned. “These are the things that will enable you to legally deduct certain management expenses and allow you to treat the income from timber sales that save you some taxes.”
Dr. Linda Wang, National Timber Tax Specialist for the U.S. Forest Services, also offers income tax tips for forest landowners. Her advice is available through the USDA:
TIMBER CASUALTY AND THEFT LOSSES
Loss of timber from a casualty — a sudden, unexpected and unusual event such as a fire or severe storm — may be deductible from your taxes. The deduction is the lesser of the decrease in the fair market value caused by the casualty or your basis in the timber block (the area you use to keep track of your basis).
A competent appraisal usually is required. Similarly, a theft loss deduction is limited to the lesser of the decrease in fair market value or your basis in the stolen timber.
Donors of qualified conservation easement can take a tax deduction.
The deduction is up to 50 percent (or 100 percent for qualified farmers and ranchers, including forest landowners) of the taxpayer’s adjusted gross income in a year. Any excess donation over the 50- or 100-percent limit may be carried forward to 15 years.
FILING FORM T (TIMBER)
You must file Form T (Timber), Forest Activities Schedule, if you claim a timber depletion deduction, sell cut products in a business (under Sec. 631(a)), or sell outright timber held for business use. However, if you only have occasional timber sales (one or two sales every three or four years), you are not required to file.
Keep good records
Canham said that you don’t have to keep all your records in a big cash book; however, you should keep track of the upkeep and inspection of your forest. “Keep [a cash book] for your forest property,” he said. “Keep notes like, ‘Take look at the property, a look over the pinesaw timber, didn’t see anything major. Had a nice walk along the creek.’ You kept a record that you went to your property that day. This way, you can deduct your mileage to the property.”