Article #33, March 2000
By Bill Cook
As the winter passes into spring, one of the most well known seasonal events is tax time! If you have received money from timber sales, Uncle Sam is going to want his cut of the take. But there’s no reason to pay more taxes than you have to.
Normally, when you receive personal income, this is reported on the 1040 and you turn to the tax tables and pay whatever they say you should pay. This is called “ordinary income.” You can report your timber sale income in this way, but you’re going to end up paying a lot more taxes than you need to, and maybe even some penalties. If you declare timber income as “ordinary” income, then you also must pay full self-employment taxes, that’s about 14 percent, in addition to the income tax from the tables. Ouch!
Timber sale income can usually be reported as “capital gains” income. Capital gains is that gain (or loss) in the value of something, such as your timber, since the time you bought it. The tax rates on capital gains are generally lower than ordinary income and you don’t have to pay the self-employment taxes. This is usually a pretty good deal.
To make matters more complicated, not all the income received from the timber sale needs to be taxed at all. The standard deduction involves the money that you have already invested in the timber. The money used to pay for the timber in the first place is called the “basis”. You already paid taxes on the money that you bought the timber with. You don’t have to pay again, unless you want to. If you harvested all the timber on your property, then the full amount of the basis can be a deduction. If you harvested only a portion of the timber, then only a portion of the basis can be used as a deduction. The basis that you can use as a deduction is called the “depletion allowance.”
There are other allowable deductions to the timber sale income. If you hired a forester to set-up and administer the timber sale, those fees are deductible. The costs of advertising bids, trail construction, surveying, attending classes, are all examples of what might be deductible. In some cases, if you fall in the appropriate tax category, a portion of your property taxes may be deductible.
Keeping good records is very important. If you don’t have a receipt, don’t try to deduct it. A forest management plan can be a critical document for several reasons. You need to know what you paid for your property and what portion of the payment was for the timber, separate from the land and buildings. The timber volume in the forest before the sale and volume harvested need to be known. The timber volume in the forest when you bought the timber must be calculated.
For more information, contact your County MSU Extension office for a copy of “Understanding Forestland Taxes” by Bill Schlosser. They also have access to a few other documents. You can also request that a “Timber and Taxes” workshop be scheduled in your area. If you have Internet access, try www.timbertax.org for information from Bill Hoover, a nationally known authority in timberland taxation.
Figuring out the taxes from timber sale income can be complicated. I always suggest a forest owner enlist the services of a professional tax preparer familiar with timber taxation. If you had a timber sale in 1999, let your fingers do the walking through the yellow pages!
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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
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