The Forest Landowners Guide to the Federal Income Tax: Table of Contents

Publications > Forest Landowners Guide to the Federal Income Tax, Ag. Handbook No. 718

Table of Contents

Chapter 1. Introduction
Purpose	1
New Information	1
Internal Revenue Service Review	2
Chapter 2. Timber Investment Considerations
Characteristic of a Timber Investment	3
Risk	3
Investment Expenditures	4
Land	4
Merchantable Timber	4
Operating and Management Expenses	5
Investment Revenues	5
Timber Sales	5
Hunting Leases	5
Miscellaneous Revenues	5
Economic Considerations	5
General Economic Trends	6
Economic Decision Criteria	6
Net Present Value (NPV)	6
Benefit/Cost Ratio (B/C)	6
Internal Rate of Return (IRR)	7
Equal Annual Equivalent (EAE)	7
Timeline	7
A Forest Investment Example	8
Summary	11
Chapter 3. Tax Planning
The Planning Team	13
Developing Integrated Plans	13
Introduction	13
Advantage of Timber Investments	13
Estate Planning Role	14
Planning Implications	14
Substantial Initial Investment	14
Long Preproductive Period	16
Tax Considerations When Forest Land Is Acquired	16
Tax Considerations When Selling Timber	16
Chapter 4. General Tax Considerations
Types of Forest Ownership and Operation	17
Purpose for Holding Timber	17
Personal Use	17
Investment	17
Business	17
Active Business Interest	17
Passive Interest	17
Types of Taxpayers	18
Structuring Your Timber Activities	18
Chapter 5. Cost Considerations
Capital Costs	21
Original and Adjusted Basis	21
Purchased Assets	21
Inherited Assets	21
Assets Received by Gift	22
Other Types of Acquisition	22
Allocation of Original Basis	22
Establishment of Accounts	23
Land Account	23
Depreciable Land Improvement Account	23
Timber Accounts	25
Equipment Accounts	26
Reforestation Tax Incentives	26
Amortization	28
The Tax Credit	29
Depreciation and the Section 179 Deduction	29
Depreciation Deduction	29
Section 179 Deduction	35
Disposition of Depreciated Property	38
Operating Expenses and Carrying Charges	38
Carrying Charges	39
The Passive Loss Rules	40
Timber Held as Part of a Trade or Business in Which the Taxpayer Materially Participates	40
Material Participation	40
Retired or Disabled Owners and Their Surviving Spouses	41
Reporting Expenses	41
Timber Held as Part of a Trade or Business in Which You Do Not Materially Participate	41
Timber Held as an Investment	42
Management Costs	42
Taxes	42
Interest	42
Reporting Expenses	43
Chapter 6. Income Considerations
Timber Sale Receipts	45
Determining the Amount of Gain or Loss	45
Costs of Sale	45
Adjusted Basis	45
How To Recover Your Basis	45
Recovery of Basis - Disposal of Standing Timber	46
Recovery of Basis - Cutting of Standing Timber	46
Determining the Kind of Gain or Loss	50
Capital Gain Status is Important	51
Capital Gains from Timber Transactions	51
Sale of Standing Timber for a Lump Sum	52
Disposal of Standing Timber With an Economic Interest Retained (Section 631(b))	53
The Cutting of Standing Timber With an Election to Treat the Cutting as a Sale (Section 631(a))	55
Government Program Payments	58
Qualifying Payments	58
Determining the Excludable Amount	59
Including Cost-Share Payments in Gross Income	60
Recapture Provisions	61
Other Timber-Related Receipts	61
Information Returns	61
Chapter 7. Tax Implications of Property Exchanges
Introduction	63
Nonrecognition Mandatory for Qualified Transactions	63
Properties Eligible for Like-Kind Exchange Treatment	63
Exchange of Real Property for Real Property	64
The Meaning of Investment and Trade or Business	64
Change in Use	64
Time Considerations	64
Multi-Party Exchanges	64
Assumption of Liabilities	65
Exchanges Between Related Parties	65
Basis After a Nontaxable Exchange	65
Application to Timber Properties	65
Reporting Like-Kind Exchanges	66
Chapter 8. Casualties, Thefts, and Condemnations
Discussion Limited to "Timber"	67
Normal Losses Not Deductible	67
Noncasualty Losses	67
Casualty Losses	67
Disease or Insect Infection	68
Drought Loss	68
Combinations of Factors	68
Salvage Requirement	68
Determining the Amount of Deductible Loss	68
Determining Volume of Timber	69
Determining Basis of Timber Destroyed	69
Year of Deduction	69
Destruction of Unmerchantable Timber	70
Buildings and Equipment	70
Determining the Decrease in Fair Market Value	70
Theft Losses	71
Year Deducted	71
Reduce Theft Losses by Anticipated Recovery	71
Multiple Damages	71
Condemnations	71
Condemnations for Right-of-Way Easements	71
Basis for Figuring Gain or Loss	72
Recovery of Expenses	72
Casualties and Thefts	72
Condemnations	72
Postponing Gains from Involuntary Conversions	72
Determining the Gain	73
Requirements to Postpone Gain	73
Basis of Replacement Property	73
Reporting Gains and Losses From Casualties, Thefts, Condemnations, and Noncasualty Losses	73
Casualties and Thefts	73
Reporting Gain or Loss - Property Held for 1 Year or Less	74
Reporting Gain or Loss - Property Held for More than 1 Year	74
Reporting Gain or Loss From Income Producing Property	74
Condemnations	74
Property Held for 1 Year or Less	74
Business or Investment Property Held for More Than 1 Year	74
Property Held Primarily for Sale	74
Property Held for Personal Use	74
Noncasualty Losses	74
Chapter 9. Tax Implications for Forest Ownership
Introduction	79
Tax Law Keyed to Production of Income	79
Conservation Easements	79
Qualifications for Charitable Deduction of Conservation Easements	80
Qualified Organization	80
Conservation Purpose	80
Qualified Real Property Interest	80
Valuation of Donation	80
Estate Gift Tax Exclusion for Land Subject to a Qualified Conservation Easement	81
Chapter 10. Other Tax Considerations
Installment Sales	83
Introduction	83
Calculating Installment Sale Income	83
Gross Profit Percentage	83
Selling Price	84
Adjusted Allowable Basis	84
Payments	84
Escrow Accounts	84
Electing Out	84
Unstated Interest and Imputed Interest	85
Reporting Installment Sales	85
Sales to Related Parties	85
Alternative Minimum Tax for Individuals	85
Alternative Minimum Tax Calculation	86
Self-Employment, Social Security Tax	86
Treatment of Spouses	87
Excluded Income Items	87
Christmas Tree Growers	87
Other Forest Products	87
Cost-Share Payments	88
How to Calculate Self-Employment Tax	88
Including timber Gains in Self-Employment Income to Guarantee Benefits	88
Employment Status	89
Behavioral Control	89
Financial Control	89
Type of Relationship	90
Chapter 11. Christmas Tree Production
General Considerations	91
Treatment of Costs	91
Establishment Costs	91
Operating Expenses and Carrying Charges	91
Uniform Capitalization Rules	91
Treatment of Income	92
Christmas Tree Sales Income	92
Section 1221	92
Section 631(b)	92
Section 631(a)	92
Choose and Cut Operations	94
Chapter 12. Form of Forest Landownership and Business Organization
Basic Ownership Considerations	95
Sole Ownership	95
Co-Ownership	95
Tenancy in Common	95
Joint Tenancy	95
Tenancy by the Entirety	95
Life Estates	95
Community Property	95
Business Management Organization	96
Partnerships	96
Unlimited Liability	96
Minors as Partners	96
Partnership Taxation	96
Limited Partnerships	96
Corporations	96
Corporate Taxation	97
Subchapter S Corporations	97
Tax Considerations	97
Limited Liability Companies	97
Income Tax Features	97
Other Tax Entities	97
Chapter 13. Researching a Tax Question and Appeals Procedures
Statutory Law	990
Administrative Law	990
Revenue Rulings	100
Revenue Procedures	100
Chief Counsel's Memoranda	100
News Releases, Notices, and Announcements	100
Private Letter Rulings	100
Technical Advice Memoranda	100
Case Law	100
Federal Court System	101
Tax Court	101
District Court and Claims Court	101
Circuit Court of Appeals	101
U.S. Supreme Court	102
Interpreting Case Law	102
Audits and Appeals	102
How Returns Are Selected for Examination	102
The Examination Process	103
If You Agree	103
If You Do Not Agree	103
How to Stop Interest from Accruing	103
Appeals Within the IRS	104
Appeals to the Courts	104
Claims for Refund	104
Additional Information	105
Integrated Example of Tax Research	105
Chapter 14. Sources of Tax Assistance
IRS Publications	107
Commercial Tax Services	108
The Internet	108
Current Developments	108
Guidebooks	109
Chapter 15. Forest Records
Tax Purposes for Forest Landowners	111
Management Information	111
Accounting Methods	111
Cash Basis Method	111
Accrual Basis Method	111
Recordkeeping Systems	112
Shoe Box	112
A Forest Landowner's Journal	112
A Forest Landowner's Journal with Accounts	112
Accounts	112
Capital Accounts	112
Land Account	112
Timber Account	113
Young-growth Subaccount	113
Plantation Subaccount	113
Amortization of Reforestation	113
Depreciation Accounts	113
Expense Accounts	113
Capital Income Accounts	113
Ordinary Income Accounts	114
General Business Accounts	114
A Comprehensive Example of Forest Land Purchases and Management	114
Records for Forest Land Purchases	114
Records for Forest Land Management	115
Glossary	125
Appendix 1. Summaries of Selected Revenue Rulings
Basis and Depletion Allowance	139
Capital Gains	140
Like-Kind Exchanges	143
Involuntary Conversions	143
Appendix 2. IRS Form T (Timber)
Index	153