Don't File Electronically If Attachments Need to be Submitted
Although the IRS is working to have 100 percent of returns filed electronically, i.e. e-returns, many timberland owners will need to file on paper. Attachments are frequently required, for example, for taxpayers electing to expense reforestation deductions under section 194 of the Code, or who exempt the qualified portion of a cost-share payment under Sec. 126. Also, Form T may need to be filed. Starting with the 2008 filing season for 2007 tax returns, the IRS has revised Form 8453 when attachments are mailed in after the return is filed electronically. This form was previously used to file a paper signature for an e-return. The revised Form 8453 can not be used for attachments not specifically listed on the front of the form. None of the attachments typically associated with timber transactions are listed. Thus, if you need to file a return with timber related attachments you'll need to file on paper. Of course tax software can be used to prepare your return, but it will need to be printed out and mailed in with the required attachments. Do not file electronically and then simply mail in the attachments. The IRS will not be able to merge the electronic and paper elements.
Electronic Filing and Form T
If you file electronically using one of the commercial software packages you most likely will not be able to include Form T with your electronically filed return. Apparently these software packages don't include the option of completing and filing Form T. We have been advised that you should not send Form T by mail after having submitted your return electronically. A reasonable alternative is to do as much as you can with the software, print out the completed forms, complete Form T by hand or on-line and print the completed Form T, then mail in your entire return. We are working with the IRS to explore other options.
Note that most transactions are entered on Form T and placed in your permanent tax files. You only need to file Form T with the IRS if (1) you claim a deduction for depletion of timber, (2) elect under section 631(a) to treat the cutting of timber as a sale or exchange, or (3) make an outright sale of timber under section 631(b). If you do file Form T you are to complete all the parts that apply to your transactions for the year. For example, if you had a timber sale and claimed a depletion deduction, and also had reforestation expenses, you would complete Part II, Part III, and Part IV. If instead all you had were reforestation expenses, you would not file Form T. You'd complete Part IV for your own records. However, even if one or more of these criteria apply to you, you do not need to file Form T if you only make an occasional sale of timber (one or two sales every 3 or 4 years. (Posted by WLH, 2/1/06)
|Filing Using Turbo Tax||TM|
This is not an endorsement of any particular tax preparation software package, but we've been asked to describe how to report timber transactions using TurboTax ™ . The first step is to decide what version you need given your situation. If you treat your timber activities as an investment, or a business filing Form 1040, Schedule C or F, you should find the Premier Investment version adequate. It handles timber related expenses, including the reforestation deduction and amortization, except for the attachment needed to report the details of each project. It also handles timber disposals, not timber depletion and Form T. There is a depletion link but it's for percentage depletion, not applicable to timber which is strictly cost depletion. Thus, the software enables you to get the needed numbers onto the correct standard forms, but if you are reporting reforestation projects and timber sales you'll need to print out the filled-in forms, complete Form T and needed explanatory attachments by hand, add the attachments to the forms printed out, and file by mail.
If you file as a partnership, which includes LLC's and Sub-S corporations, a C corporation, or other form of business you'll need the Home and Business version. I'll only discuss using the Premier Investment version. Note that data is entered by major category, i.e. income, deductions, etc., not like you do on a paper form with income and expenses going on the same form.
The software also handles you state's income tax, if any, by transferring information from your federal return and asking you for the information needed to adjust your federal return amounts for differences under your state's tax code.
Your enter transactions into the software under two major categories: Income and Deductions. The software will guide you through the categories under the income and deductions headings, or you can go to a list of categories. There are buttons at the bottom of the screen for making this choice.
The "Search Topics or Forms" button allows you to find specific pages, but the key words you enter must be very general. Also, if you're used to entering transactions on a specific form the TurboTax ™ summary pages have a button that pulls up a copy of the appropriate IRS form with your data entered. Make certain that your browser setting allows pop-ups. You'll need to use the "Topics List" button at the top of the screen to get to some pages. Like any complicated software package you'll have to invest time to learn all its nuances. The hints given below should at least get you started.
Timber Treated as an Investment for Tax Purposes . If your timber activities aren't extensive enough to constitute a business most of your expenses are reported as itemized deductions and your timber is a so-called capital asset and disposals are reported on Schedule D of Form 1040.
Expenses – Go to the Deductions and Credits section by clicking on the button so labeled at the top of the screen. Under "Your Home" "Real Estate Taxes Paid," report the property taxes you paid on your timberland. Under "Other Deductions & Credits," "Other Deductible Expenses," go to "Any Less Common Deductions." A table will come up to fill in a description and amount for each expense. TurboTax ™ will determine if it's better to take the standard deduction. If the standard deduction is better you should consider electing to treat your expenses so qualifying for the year as carrying charges.
Capital gains – If you sell timber on the stump and it qualifies as a long-term or short-term capital gain, go to the "Income" section, and click on "Stocks, Mutual Funds, Other Investments", then "Investment Sales." A form for capital gains will come up. You fill in the amount you were paid minus the expenses of sale, then enter the cost of the timber, i.e. your allowable basis (depletion allowance) for the timber sold. Don't for get to file Form T as well.
Reforestation Expenses - Don't report these as miscellaneous itemized deductions subject to the 2% limitation. Click on "Topics List," and scroll down to "Income," "Income," "Business Credits," "Business Deductions." Click the "Reforestation amortization deduction" box and screens will come up to enter your expenses. Don't forget to also file an attachment giving detailed information about the project TurboTax ™ assumes you qualify for only one timber property and $10,000 limit. Amounts over $10,000 are amortized automatically. If you believe that you qualify for more than one $10,000 limit because you have more than one qualifying property you'll want to file by hand.
Timber Treated as a Sole Proprietorship or Farm Business . Remember that the Premier Investment version of TurboTax™ handles only Schedules C and F, and these at a cursory level.
Expenses – If you file Schedule C click on "Topics List," "Income," "Income," "Business Credits," "Business Deductions." Enter by category of expense if those listed that are applicable, otherwise go to "Other" and "Less Common Expenses." If you file as a farm click on "Topics List," "Income," "Income," "Other Income," "Other Income," "Farm (Schedule F).
Capital gains - If you use Schedule C click on the "Income" button on the main page, then "Select Specific Topics" button on the next page, then "Business Income, Schedule C." Go to the page for disposals of business assets. Enter sale proceeds net of sale expenses, and your allowable basis for that sale. If you use Schedule F go to Other Income, Schedule F. There is a separate page to report disposals of farm business property.
Reforestation Expenses - Enter the same way as for investments.