Article #104, February 2006
By Bill Cook
Did you sell timber in 2005? If so, it's time to figure out what you owe Uncle Sam. The idea is to make the tax as low as possible and retain as much income as possible for yourself. The IRS tax code and good records will help you do that, along with a tax preparer familiar with the rules.
Surprised that you might owe taxes for selling timber? If so, now is a good time to learn about what you need to do.
The most important way to reduce the tax burden is to claim the income under capital gains and not ordinary income. Ordinary income comes from salaries, wages, and the like. Capital gains income is taxed at a much lower rate.
It is easy for most people to meet the eligibility rules for capital gains treatment.
Capital gain is the increase in value of an investment, in this case timber. You don't have to pay taxes on those dollars already invested in the timber. You do have to pay taxes on the income beyond what has been invested. This may require a little explanation.
The value of timber is separate than the value of the land. At the time of acquisition, the timber had a value. You may have paid for the timber or inherited the timber, but in either case it had a value at acquisition. This value is called a "basis". Typically, a higher basis is beneficial.
All or part of the timber basis can be subtracted from timber sale income. If you sold all of the timber, then you can use the entire basis. If you sold 50 percent of your timber, you can use 50 percent of the basis. The proportion of your basis subtracted from the gross income is called "depletion."
Often times, figuring the value of just the timber at the time of acquisition can be a problem. Foresters and real estate agents can help crank the numbers. If the timber has been owned for over 20 years, it is usually not worth the cost of calculating the timber basis. If the timber has been owned less than 10 years, then it is usually worth figuring out the timber basis.
Under capital gains, you also don't have to pay self-employment taxes, which comes to 15.3 percent of the income. Avoiding this, alone, will save a forest owner quite a bit.
The capital gains tax rate for timber sold after 6 May, 2003 is 15 percent. If you fall into the 10 or 15 percent ordinary income tax brackets, the capital gains rate is 5 percent. This is a good deal for most people.
Many deductions from the timber sale income are also eligible, such as consultant fees, workshop registration fees, timber sale promotion costs, etc. These deductions reduce your taxable net income, which saves you money. Receipts are essential.
Keep in mind that no two timber sales are the same, so there aren't many standard values to apply to every situation. That's why you should seek the services of a professional tax preparer familiar with timber sale IRS codes.
These folks can also help you work through a maze of forms, such as Form T (revised), Schedule D, Schedule F, and other documents. IRS forms can be obtained at [www.irs.gov] or 1-800-829-3676. You won't find all of them at the local library.
You'll need good records. It's hard to claim something without receipts. Having a written management plan, prepared by a professional forester, goes a long way in establishing the most favorable tax category for you. Memberships in organizations such as the Michigan Forest Association, or having a certified Tree Farm, are other excellent ways to help define you as an "active participant".
If you want to learn more about federal timber sale income taxes, there is a really good Internet source [www.timbertax.org]. This website contains many articles, topics, tips, and current information provided by the nation's top forest taxation experts. Most forest owners will have only one or two timber sales in their lifetime. It is usually a good idea to work with a tax preparer familiar with timber taxation.
Extension has a newly revised publication "Minimizing Federal Income Tax
for Forest Landowners." Contact the County Extension office for a copy.
You can also obtain an on-line copy at [http://web2.msue.msu.edu/bulletins/intro.cfm]
using inventory number 343.
- 30 -
Bill Cook is an MSU Extension forester providing educational programming for the entire Upper Peninsula. His office is located at the MSU Upper Peninsula Tree Improvement Center near Escanaba. The Center is the headquarters for three MSU Forestry properties in the U.P., with a combined area of about 8,000 acres. He can be reached at firstname.lastname@example.org or 906-786-1575.
by Bill Cook, Forester/Biologist, Michigan State University Extension, 6005
J Road, Escanaba, MI 49829
906-786-1575 (voice), 906-786-9370 (fax), e-mail: email@example.com
of these articles is encouraged. Please notify Bill Cook.
By-line should read "Bill Cook, MSU Extension" Please use the article trailer whenever possible.
Michigan State University is an affirmative action equal opportunity institution. The U.S. Department of Agriculture prohibits discrimination on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital status or family status. (Not all prohibited bases apply to all programs.)
This website is maintained by Bill Cook, Michigan State University Extension Forest in the Upper Peninsula. Comments, questions, and suggestions are gratefully accepted.
Last update of this page was 5 November, 2018
This site is hosted by School of Forest Resources and Environmental Science at Michigan Technological University.