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TIMBER TAXATION
Article #92, February, 2005
By Bill Cook

     Time for many of us to begin preparing our 2004 income taxes. For those folks who had timber sales last year, there are taxes due to Uncle Sam. Fortunately, the IRS has a special set of codes specifically designed to minimize that tax liability. Unfortunately, parts of it can be difficult to understand.

     Income generated from the sales of stumpage should not be treated as ordinary income, such as wages, salaries, etc. Stumpage is the money received by tree owners for their standing trees. Timber sale income should be treated under capital gains provisions.

     Capital gains is the increase in value of an investment, in this case timber. You don't have to pay taxes on those dollars invested in the timber. The value of timber is separate than the value of the land. At the time of acquisition, the timber had a specific 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 the 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 establish what the common values were in a certain area in a particular year. 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 come to 15.3 percent of the income. 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.

     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 the 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.

     For the tax preparer, 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 income tax treatment of timber sales, 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.

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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 cookwi@msu.edu or 906-786-1575.

Prepared 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:  cookwi@msu.edu

Use / reprinting of these articles is encouraged. Please notify Bill Cook.
By-line should read "Bill Cook, MSU Extension" Please use the article trailer whenever possible.

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Last update of this page was 22 September, 2005

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