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Forest Landowners' Guide to the Federal Income

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Forest Landowners' Guide to the Federal Income United States Department of Agriculture Forest Landowners’ Forest Service Guide to the Federal Agriculture Handbook No. 718 Income Tax United States Department of Forest Landowners’ Agriculture Guide to the Federal Forest Service Income Tax Agriculture Handbook No. 718 Harry L. Haney, Jr., Garland Gray Professor of Forestry, Department of Forestry, Virginia Polytechnic Institute and State University, Blacksburg, Virginia William L. Hoover, Professor of Forestry, Purdue University, West Lafayette, Indiana William C. Siegel, Attorney and Forest Service Volunteer, River Ridge, Louisiana John L. Greene, Research Forester, USDA Forest Service, Southern Research Station, New Orleans, Louisiana The Office of the Chief Counsel of the Internal Revenue Service reviewed the manuscript and made many valuable suggestions for improvement March 2001 Supersedes “Forest Owners’ Guide to the Federal Income Tax,” Agriculture Handbook No. 708, issued October 1995 The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, sexual orientation, and marital or family sta- tus. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for com- munication of program information (Braille, large print, audiotape, etc.) should contact USDA’s TARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 1400 Independence Avenue, SW, Washington, DC 20250-9410 or call (202) 720-5964 (voice and TDD). USDA is an equal opportunity provider and employer. ii Abstract Harry L. Haney, Jr., William L. Hoover, William C. carrying charges, the passive loss rules, timber Siegel, and John L. Greene. 2000. Forest income and capital gains, government program Landowners’ Guide to the Federal Income Tax. cost-share payments, tax treatment of other forest- Agriculture Handbook 718. Washington, DC: U.S. related receipts, property exchanges, casualty losses Department of Agriculture. and other involuntary conversions, conservation easements, installment sales, the alternative Updates, expands, and supersedes Agriculture minimum tax for individuals, self-employment Handbook No. 708, Forest Owners’ Guide to the and Social Security taxes, and Christmas tree Federal Income Tax. Incorporates tax legislation production. Explains forms of Forest passed and administrative changes promulgated Landownership, business management organi- since 1994. Provides a framework for analyzing zation, how to research a tax question, sources of forest management investments and a chapter on tax assistance, and how to keep forest records. tax planning. Discusses Federal income tax consid- Provides a glossary of terms, summaries of selected erations for Forest Land, including capital costs, IRS Revenue Rulings, and a blank IRS Form T reforestation tax incentives, depreciation and the (Timber) for reporting forest-related activities. Section 179 deduction, operating expenses and iii Table of Contents PAGE PAGE Chapter 1. Introduction Planning Implications ....................................14 Purpose ..................................................................1 Substantial Initial Investment.....................14 New Information..................................................1 Long Preproductive Period..........................16 Internal Revenue Service Review .........................2 Tax Considerations When Forest Land Is Acquired ..........................................................16 Tax Considerations When Selling Timber........16 Chapter 2. Timber Investment Considerations Characteristics of a Timber Investment ..............3 Chapter 4. General Tax Considerations Risk .....................................................................3 Types of Forest Ownership and Operation......17 Investment Expenditures ..................................4 Purpose for Holding Timber..........................17 Land.................................................................4 Personal Use.................................................17 Merchantable Timber ....................................4 Investment ....................................................17 Operating and Management Expenses ........5 Business.........................................................17 Investment Revenues.........................................5 Active Business Interest ............................17 Timber Sales ...................................................5 Passive Interest ..........................................17 Hunting Leases ...............................................5 Types of Taxpayers ..............................................18 Miscellaneous Revenues ................................5 Structuring Your Timber Activities ....................18 Economic Considerations....................................5 General Economic Trends ................................6 Chapter 5. Cost Considerations Economic Decision Criteria .............................6 Capital Costs .......................................................21 Net Present Value (NPV) ...............................6 Original and Adjusted Basis ...........................21 Benefit/Cost Ratio (B/C) ...............................6 Purchased Assets...........................................21 Internal Rate of Return (IRR)........................7 Inherited Assets.............................................21 Equal Annual Equivalent (EAE) ...................7 Assets Received by Gift ................................22 Timeline .............................................................7 Other Types of Acquisition .........................22 A Forest Investment Example ..............................8 Allocation of Original Basis........................22 Summary..............................................................11 Establishment of Accounts.............................23 Land Account ...............................................23 Chapter 3. Tax Planning Depreciable Land Improvement Account...23 The Planning Team.............................................13 Timber Accounts ..........................................25 Developing Integrated Plans .............................13 Equipment Accounts ...................................26 Introduction.....................................................13 Reforestation Tax Incentives ..............................26 Advantages of Timber Investments................13 Amortization....................................................28 Estate Planning Role .......................................14 v The Tax Credit..................................................29 Disposal of Standing Timber With an Economic Interest Retained (Section 631(b))....................53 Depreciation and the Section 179 Deduction..29 The Cutting of Standing Timber With an Depreciation Deduction.................................29 Election to Treat as a Sale(Section 631(a))...55 Section 179 Deduction...................................35 Government Program Payments.......................58 Disposition of Depreciated Property.............38 Qualifying Payments.......................................58 Operating Expenses and Carrying Charges......38 Determining the Excludable Amount ...........59 Carrying Charges.............................................39 Including Cost-Share Payments in Gross The Passive Loss Rules........................................40 Income .............................................................60 Timber Held as Part of a Trade or Business in Recapture Provisions .......................................61 Which the Taxpayer Materially Participates ...40 Other Timber-Related Receipts..........................61 Material Participation ..................................40 Information Returns ...........................................61 Retired or Disabled Owners and Their Surviving Spouses.........................................41 Chapter 7. Tax Implications Reporting Expenses ......................................41 of Property Exchanges Timber Held as Part of a Trade or Business in Introduction........................................................63 Which You Do Not Materially Participate ....41 Nonrecognition Mandatory for Qualified Timber Held as an Investment..........................42 Transactions ........................................................63 Management Costs ......................................42 Properties Eligible for Like-Kind Exchange Taxes ..............................................................42 Treatment ............................................................63 Interest ..........................................................42 Exchange of Real Property for Real Property............................................................64 Reporting Expenses......................................43 The Meaning of Investment and Trade or Business............................................................64 Chapter 6. Income Considerations Change in Use .................................................64 Timber Sale Receipts...........................................45 Time Considerations.......................................64 Determining the Amount of Gain or Loss....45 Multi-Party Exchanges........................................64 Costs of Sale .................................................45 Assumption of Liabilities...................................65
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