Minimizing Timber Sale Tax Liability

Hiring a tax preparer who knows timber sale tax treatment could save forest owners a lot of money.

If you received money for the sale of timber, taxes are expected to be paid on that income. The amount of tax you pay on that income will depend on the nature of the timber sale and how well you follow the rules to minimize the tax liability. Doing nothing will result in paying a higher tax and perhaps penalties if you’re caught under-reporting!

The first step is to visit the National Timber Tax website. This resource is kept current with the most recent changes in timber tax policy and provides access to forms and information. You’ll want to download Form T.

In addition, it might be worth it to hire a professional tax preparer. Make certain the individual knows about timber sale income tax treatment as some preparers do not. The IRS code concerning timber sale taxation can be a bit obscure.

There are three main ways to reduce the tax you owe:

1)      Report income as capital gains

2)      Calculate the timber basis and depletion

3)      Keep receipts for all out-of-pocket expenses related to the timber sale

Check if your timber sale income is eligible for capital gains tax rates, which are lower than ordinary income tax rates. Most timber sale income is eligible. You will need to have owned the timber for at least 12 months prior to the sale. Also, capital gains income does not have to pay self-employment taxes, which is nearly 15 percent. Reporting timber sales income as capital gains can save you a lot of money.

Calculating basis and depletion values can be a bit confusing. The basis is the monetary value of all your timber at the time it was purchased. Just the timber, not the land. The depletion value is a portion of that basis and can be deducted from timber sale income based upon the percentage of total wood volume harvested.

For example, if you harvested half your wood volume, then half the basis value can be deducted from the timber sale income. If the entire forest volume was harvested, then the entire basis value can be deducted from the timber sale income. Working with a professional forester can help identify timber volumes and values. This calculation is especially helpful if you have owned your timber for less than 10 years.

Deductions are fairly easy to subtract from the gross timber sale income. You will need receipts. Some expenses fall into a gray area as to whether or not the expense was directly attributable to the timber sale. Expenses for hiring a consulting forester or to set up and administer the timber sale are clearly a deduction. Building a graded road or surveying a boundary line are debatable. Determinations are best made with the help of a tax preparer that knows about timber sale taxation.

For many forest owners, a timber sale is a once-in-a-lifetime event. So, the same is true for the taxation part. If you’ve recently sold timber, then take advantage of the IRS rules that minimize the tax bill. If you’re contemplating a timber sale in the near future, you might want to take a look at current IRS rules before the sale. Planning ahead can oftentimes save you money.

In addition to the national Timber Tax website mentioned above, Penn State Extension offers a couple of other resources that may be helpful.

·         Publication: Timber Taxation: A General Guidefor Forestland Owners

·         Online Course: Forest Taxation: Forest Financeand Timber Tax Education

This article was first published by Michigan State University Extension by Bill Cook, Michigan State University Extension.