Forest Landowner Guide to the Federal Income Tax
Forest Landowner’ Guide to the Federal Income Tax
This 152 – page book is available from MFA.
Simply send a $5.00 check for shipping to:
MFA, Suite 7, 1111 Cloquet Avenue, Cloquet MN 55744
State & Local Property Taxes
Minnesota’s private woodland owners can choose between one incentive and two preferential property tax programs:
- The Sustainable Forestry Incentive Act (SFIA),
- The 2c Managed Forest Land Classification (Class 2c)
- The Rural Preserve Program.
Click here for more general information on these programs.
Click here for informaiton on SFIA following the 2011 legislative session.
Geary Searfoss, a certified public accountant who specializes in woodland taxes, says there are three ways to hold timber property for tax purposes:
- As a business
- As an investment,
- As a hobby.
From a tax standpoint, holding the property as a business, is the most advantageous because all expenses are deductible against any and all other income. That is, if you were to hold your woodland as a business and had $10,000 in expenses last year associated with the woodland but no income, the $10,000 can be deducted against other income, such as earnings reported on W2 from a job. Of course, IRS will look closely at your deduction and you had better be prepared to show that you are actually operating your woodland as a business with a profit motive.
Those who classify their woodland as an investment can deduct expenses but only if they itemize deductions on a Schedule A.
Most small private woodland owners are hobbyists. As such, we do not have to convince IRS we are in it to make a long term profit. We can deduct expenses but only up to the amount of income generated. This calculation is made on a year-by-year basis so the receipt of income this year will have no bearing on expenses next year. As with an investment, hobby expenses are itemized deductions.
One Really Good Tax Break
The government does give private woodland owners one really good tax break: We can deduct up to $10,000 of reforestation expenses on a yearly basis. To qualify for this deduction, we do not need to treat the activity as a business. We don’t need to itemize either, as the amount can be deducted in the “Adjustments” section of the front page of Form 1040.
Eligible costs include all out of pocket expenses incurred in the planting of trees such as site preparation, seed or seedlings, labor (not your own – sorry!), tools, etc. The property being planted must be at least one acre and contain trees of “significant commercial quantities”. Specifically excluded are planting of trees for shelterbelts, ornamental trees, or Christmas trees.
Have Questions About Federal Taxes?
One good source of information is the Timber Tax web site.
Very few sections of the Internal Revenue Code are written specifically for timber. This means there is a considerable amount of interpretation involved. This website was developed to be used by timberland owners, as well as a reference source for accountants, by answering specific questions regarding the tax treatment of timber related activities.
Geary Searfoss’ site also contains good information.
Further, DNR has contracted with Geary Searfoss to provide free tax information to Minnesota’s woodland owners. Contact him via phone or email:
Geary N. Searfoss, CPA