Tax Planning Strategy: Timber*

Explore bountiful tax savings with tax planning using the timber deduction.

 

* 26 U.S. Code § 194 - Treatment of reforestation expenditures, (a) Allowance of deduction, https://www.law.cornell.edu/uscode/text/26/194

 

About this page:

If you want to stop paying high taxes for you, your family, or your business, learn about the timber deduction as a tax planning strategy, is a great way to get started!

"For farmers and those who own land
where timber property is located,
we want you to know about a special tax deduction
that only you can take."
~ JLW, owner/manager, Lentax.co

Read on to learn about this tax savings deduction available to eligible farmers and land owners who have qualifying timber property.

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Woman Planting A Tree

Tax Planning & The Timber Deduction

 
Tax planning is a way to plan for any life or business changes that may affect your taxes and by using a combination tax strategies saves you money by making tax law work for you. Tax planning includes using tax exclusions, deductions, deferrals, tax rates, and credits in the right formula to keep more earnings in your pocket.
 
The Timber deduction (TIM, for short1) is an special deduction only educators can use for this purpose.

Special deduction for our farmers and land owners.

TIM can be used for up to $10,000 to offset your income for each tree, each year!

 
 
1 Our acronym, TIM, stands for the timber or the reforestation tax credit taken on IRS Form T Timber.  By entering an amount of reforestation expenses on line 4a of this form, you are electing to deduct qualifying reforestation expenses that were paid or incurred after October 22, 2004, for each qualified timber property under section 194(b). The aggregate amount of reforestation expenses which can be claimed on line 4a for any tax year cannot exceed $10,000 ($5,000 if your filing status is married filing separately) for each qualified timber property for any tax year. The remaining costs, indicated on line 4b, can be amortized over an 84-month period using the half-year convention under section 194(a). If you do not elect to deduct reforestation expenses under section 194(b), all reforestation expenses will be capitalized in a deferred timber depletion account. For more information, see Reforestation Costs in IRS Publication 535 Business Expenses.
 
The amount on Form T must be added to Part VI of IRS Form 4562 Depreciation and Amortization Part VI. IRS Form T is not required if you only have an occasional sale of timber (one or two sales every 3 or 4 years), however, you must maintain adequate records of these transactions and other timber-related activities during the year, as discussed in Recordkeeping, below. 
Man Removing Fruit From Tree

How Can I Take The TIM Deduction?

 

Step 1

Determine eligibility

Am I an eligible taxpayer?

Do my expenses qualify?

Does my property qualify?

Step 2

Create a tax plan

Do I have a comprehensive tax plan I can understand and implement?

Do I have a tax plan that includes a combination of tax strategies I can use?

Do I have all the legal regulations indicated in my tax plan for reference or research purposes?

 

Step 3

Keep adequate records

Do I have all the necessary records for substantiation?

Are my records easily retrievable in case I am required to provide substantiation, in case of an audit2?

Step 4

Take the tax benefit

Am I able to accurately complete all the necessary tax forms to receive this benefit?

Am I filing all the necessary tax forms in a timely manner to receive this benefit?

Should I make adjustments to the tax plan to take this benefit in another tax year?

 
2About IRS audits, if you get audited, it does not always suggest there’s a problem. The IRS uses several different audit selection methods: 1) Random selection and computer screening. This is where returns are selected based solely on a statistical formula. The IRS compares your tax return against what they call “norms” of similar returns. They develop these “norms” from audits of statistically valid random samples of returns, as part of their National Research Program. The IRS uses this program to update return selection information and, 2) Related examinations of returns may be selected when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit. Next, an experienced auditor is assigned the return for review. They may accept it, or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examination group. To learn more about IRS audits, visit https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits.
 
Find out how we protect you against an audit for any tax form we prepare for you, visit www.lentax.co/taxprep#Protection-Plus.
Man Farmer With Pear In Hand

How Can I Take The TIM Deduction?

Step 1
Determine eligibility

First, determine if you are one of the following eligible taxpayers that can use the TIM deduction.

 
Will you file as:
A corporation?
An estate?
An individual?
A partnership?3 
An S corporation?3
A sole proprietorship?
 

Then, determine if you own the following qualifying property:

Qualified timber property4 is property that contains trees in significant commercial quantities. It can be a woodlot or other site that you own or lease. The property qualifies only if it meets all of the following requirements.

 
Is it located in the United States?
Is it held for the growing and cutting of timber?
Will you use it in, or sell for use in, the commercial production of timber products?
Does it consists of at least one acre planted with tree seedlings
in the manner normally used in forestation or reforestation?

Next, determine if you have qualifying costs related to the qualifying property:

Qualifying costs5 are reforestation costs. They are the direct costs of planting or seeding for forestation or reforestation and that can increase the adjusted basis of the property. 

 
Did you pay for equipment used in planting and seeding?
Labor or tools?
Seeds or seedlings?
Site preparation?

Finally, determine if you have the necessary records to take the deduction:

If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts6 for each qualified timber property and include all reforestation costs and the dates each was applied. Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. 

 
 
3 The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. A partner, shareholder, or beneficiary can't make that election, however, a partner's or shareholder's share of amortizable costs can be figured under the general rules for allocating items of income, loss, deduction, etc., of a partnership or S corporation. The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each.
 
4 Qualified timber property doesn't include property on which you have planted shelter belts or ornamental trees, such as Christmas trees.
 
5 Reforestation expenses are direct costs incurred for reforestation by planting or artificial or natural seeding. This includes costs for the preparation of the site, of seeds or seedlings, and for labor and tools, including depreciation of equipment such as tractors, trucks, tree planters, and similar machines used in planting or seeding. Qualifying costs don't include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income.
 
6 Recordkeeping is essential to substantiate your right to claim this deduction. Per IRS Form T Timber instructions about recordkeeping, do not attach maps of your timber properties to this form, to substantiate any claimed deduction for depletion of timber. Instead, you are required to retain records sufficient to substantiate your right to claim the deduction, including a map (where necessary) to show clearly the location(s) of timber and land acquired, timber cut, and timber and land sold for as long as their contents may become material in the administration of any Internal Revenue law.
 
IRS Form T is not required if you only have an occasional sale of timber (one or two sales every 3 or 4 years), however, you must maintain adequate records of these transactions and other timber-related activities during the year, as discussed in next paragraph about IRS Form 4562 Part VI below. These transactions may be treated as an investment for tax purposes if your property is not held for use in a trade or business. see the Exceptions section found in the instructions,
 
According to IRS Form 4562 Part VI instructions about recordkeeping, you must attach a statement that contains the following information: 1) A description of the costs and the dates you incurred them and 2) Attach a separate statement for each property for which you amortize reforestation costs.
 
For more information about recordkeeping, visit Tax Planning Strategy: Recordkeeping.
Older Man With Helpers Planting A Tree

How Can I Take The TIM Deduction?

Step 2
Create a tax plan

Second, create a tax plan with tax strategies that uses the TIM deduction and other strategies that align with your particular facts and circumstances to minimize, defer, or eliminate business taxes in the current year, prior year, or future year.

We suggest hiring a tax consultant, like ourselves, to create a personalized tax plan for you.

 

How Can I Take The TIM Deduction?

Step 3
Keep adequate records

Third, implement the tax plan7 by keeping adequate records. Implementation could mean purchasing software or equipment or investing in a specific business enterprise to implement the strategies in the tax plan. A thorough review of your cash flow and your best estimate of future earnings are critical to realizing the tax savings in the tax plan.

Keeping adequate and reliable records plays a critical role for supporting documentation. 

 

How Can I Take The TIM Deduction?

Step 4
Take the tax benefit

Finally, take the tax benefit by filing, timely and accurately, all the necessary tax forms and worksheets to receive the benefit.

This could mean filing amended returns to adjust amounts in returns filed in prior tax years, for example, when carryforward/carryback provisions are allowed. 

7 To fully realize the tax savings in any tax plan we create, we provide implementation assistance including matching you to quality investment companies, vendors, and financers, as well as, by filing the necessary form(s) with your timely filed tax return, including extensions, for the tax year that the tax benefit will be most effective.

Interested in a personalized tax savings presentation?

Learn what tax planning can do for you! Click the "Sign Up" button below to learn more about our "Let's Talk Tax Savings" personalized presentation and complete the sign up form to get started.

 
Female Tax Planner With Calculator Man With Charts

How Do I Calculate The TIM deduction?

 

TIM calculation example:

 
Total qualifying costs for timber property #1:
+ $2,500
Total qualifying costs for timber property #2:
+ $10,000

= $12,500 is your TIM deduction that you can use to reduce income that is subject to taxes!

In this example, if you spent $2,500 and $10,000 respectively, on qualifying expenses for your qualifying timber property, up to $10,000 for each property, $12,500 total, can be used to reduce your income subject to taxes.

 
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6 You can elect to deduct up to $10,000 ($5,000 if married filing separately, unfortunately, no deduction is allowed for a trust), of qualifying reforestation costs paid or incurred after October 22, 2004 for each qualified timber property, as an expense, for each qualified timber property. The remaining costs can be amortized over an 84-month period, or 7-year period. For more information, see Reforestation Costs in IRS Publication 535 Business Expenses.
 
This deduction may have be recaptured under section 1245, if you dispose of the related qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses by reporting any gain as ordinary income up to the amortization you took. For more information, see Depreciation Recapture in IRS Publication 544 Sales and Other Dispositions of Assets.
 

Interested in a personalized tax savings presentation?

Learn what tax planning can do for you! Click the "Sign Up" button below to learn more about our "Let's Talk Tax Savings" personalized presentation and complete the sign up form to get started.

 
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"Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes"

 

---Billings Learned Hand (1872 - 1961), American Jurist, Lawyer, and Judicial Philosopher, US Federal Trial Judge, Southern District of New York, Appellate Judge of US Court of Appeals ---

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