Landowners, if you have forest on your acreage and perhaps sell timber from that property or old the land for investment-only purposes, tax planning needs to be considered, especially with April 15 approaching. Greg Frey of the US Forest Service starts with the types of tax classifications for timber landowners.
Hobby personal use, investment and trade or business.
The first two classifications signify the property owner does not have a profit motive for their timber land. Profit is the motive, though, for both the investment and trade or business categories.
So an investor is somebody who owns a forest land and let the timber grow. They intend to make money off the timber growing, but they’re not as actively involved in the day-to-day doing a lot of forest management. They’re mostly just letting the timber grow for them, whereas a business would be someone who is much more actively and regularly involved in managing their forest and producing the timber from it.
What about changes to tax law that timber landowners need to be aware of when filing their 2023 tax returns?
For starters, if you had some equipment that would normally be depreciated over time for tax purposes. In the past few years, you’ve been able to use what’s called bonus depreciation and deduct that fully in the year it was purchased. And for 2023 you’re only allowed to deduct 80% of that through bonus depreciation, and that’s going to scale down over time.
As for conservation easements for tax purposes…
If you had a conservation easement created in 2023, you’ll want to look at the new laws about how those deductions can be calculated.
There are questions about forest land carbon market participation and taxes.
From the income perspective, if you participate in a carbon market with your forest land, you may get paid for taking carbon out of the atmosphere and that gets turned into standing trees, and various markets might certify that as a carbon offset or carbon credits, and then you as a landowner could sell that credit and make money. That income from the sale of a carbon credit can be taxable, but there’s a lot of questions about at what point that would be taxable.
Frey says resources are available to forest landowners who are required to file tax returns.
We’ve recently published the tax tips for 2023, which is a really brief overview of some of the main provisions in tax law that affect many forest landowners.
The US Forest Service/land grant university-jointly produced resource is available at timbertax.org. In terms of finding a local tax professional with expertise in forest land tax planning,
If you contact your Cooperative Extension agent, they may be able to point you in the direction of a tax advisor in your area that can work with you.
Rod Bain reporting for the US Department of Agriculture in Washington, DC.