WVFA Spring 2019

I N D U S T R Y N E W S 16 West Virginia Forestry Association Mountain State Forestry  | Spring 2019 www.wvfa.org Timber Property Types It’s important to recognize that the tax treatments vary significantly for different types of properties. You must make a determination on your property type each year. Your timber may be classified under one of the following three types: (1) personal-use property (mainly for personal enjoyment vs. for profit); (2) an investment property (mainly for generating profit from growing timber or asset appreciation); or (3) a business property (with regular, active, and continuous profit- making timber activities to qualify). Businesses are subject to passive loss rules (i.e., losses from a passive business cannot be used to offset nonpassive income such as wages). In other words, deductions from a passive business may be denied for the year (when there’s no income of the passive source). A passive activity is one in which you do not materially participate, mainly based on the number of hours you participate in the business. Also, your timber may be considered a hobby if it is not engaged for profit. Losses from hobby activities are generally not deductible. Example 1: Mr. Henderson owns a 57-acre tree farm where he manages timber primarily for profit. He reports his timber as an investment. Deductions of Timber Expenses and Taxes For timber owned as a business, if you are “materially participating” in the business, the timber expenses are fully deductible on Schedule C of Form 1040. These expenses may include fees paid for forester, attorney, or accountant, precommercial thinning, firebreak maintenance, overnight travel, vegetation-competition control, insects, disease, and fire control, and depreciation from equipment used. For timber held as an investment, timber expenses (along with certain other “miscellaneous itemized deductions”) are no longer deductible, starting in 2018 through 2025 (Public Law 115-97). Example 2: Ms. Smith owns a 50-acre property as an investment. Her 2018 timber expenses of $1,000 is not deductible. State and local property taxes on timber investment property are deductible on Schedule A. Alternatively, you may elect to treat these taxes as part of the timber costs (i.e., as “carrying charges”) and deduct them upon timber sales. Property taxes paid in a trade or business are deductible on Schedule C. Severance and yield taxes paid are deductible from the timber harvests. 2018 IRS Tips for Forest Landowners The Federal income tax provisions that apply to timber have changed for the 2018 tax year from the December 2017 new tax legislation. To help family timber owners, foresters, and their tax preparers in filing their 2018 tax returns, this bulletin provides income tax guidance that is current as of September 30, 2018. By Linda Wang, USDA Forest Service