Retired couple wants to allow tree harvesting on their land

[Pactax]

I recently received a phone call from a client whose parents own about 60 acres of prime forest land in Northern Minnesota.
They have been approached by a man who would like to harvest trees from some of the land.
He offered this retired couple about $30,000 a year for these harvesting rights. I assume this man would issue
a 1099 misc income, to account for the amount paid to this couple. Is this as simple as the retired couple
filing a schedule C, thus also having to pay FICA, or is there another way to include this additional income on form
1040.

[ATSMAN]

I recently received a phone call from a client whose parents own about 60 acres of prime forest land in Northern Minnesota.
They have been approached by a man who would like to harvest trees from some of the land.
He offered this retired couple about $30,000 a year for these harvesting rights. I assume this man would issue
a 1099 misc income, to account for the amount paid to this couple. Is this as simple as the retired couple
filing a schedule C, thus also having to pay FICA, or is there another way to include this additional income on form
1040.

Here is a link that I use. I have one client in the same type of business. Don't forget depletion!

https://timbertax.org/research/revenuerulings/bda/

[FEDUKE404]

Timber depletion ???

Here is a link that I use. I have one client in the same type of business. Don't forget depletion!

https://timbertax.org/research/revenuerulings/bda/

I thought timber sales were always reported on IRS Form T https://www.irs.gov/pub/irs-pdf/ft.pdf ??

Never heard of depletion for actual trees. I did have one client who had considerable reforestation expenses in the 1980s/1990s and took most of those expenses in the year incurred as an adjustment to income. (I think there was an annual dollar limit ($15k ?) which, if exceded, then went to "basis.") I'm not sure if the RFC and/or related ITC even apply to such expenses. If depletion would be applicable for this guy, it would seem his total cost basis is pretty much already at zero ??

This client, who knows far more about trees than I (he is a "certified tree farmer") is under the impression that when the (mature) timber sells it will be a Schedule D LTCG with ~zero cost basis. There will be no Schedule C or Schedule F involved for the sale(s).

FE

[ATSMAN]

I thought timber sales were always reported on IRS Form T https://www.irs.gov/pub/irs-pdf/ft.pdf ??

Never heard of depletion for actual trees. I did have one client who had considerable reforestation expenses in the 1980s/1990s and took most of those expenses in the year incurred as an adjustment to income. (I think there was an annual dollar limit ($15k ?) which, if exceded, then went to "basis.") I'm not sure if the RFC and/or related ITC even apply to such expenses. If depletion would be applicable for this guy, it would seem his total cost basis is pretty much already at zero ??

This client, who knows far more about trees than I (he is a "certified tree farmer") is under the impression that when the (mature) timber sells it will be a Schedule D LTCG with ~zero cost basis. There will be no Schedule C or Schedule F involved for the sale(s).

FE

This is what I was referring to. Perhaps used the wrong word!

Generally, direct cost of reforestation including girdling, herbicide application, baiting of rodents, labor and tool expense, and the planting and seeding equipment depreciation are capital expenditures recoverable through "depletion allowances" when the timber is cut or as adjusted basis if the timber is sold.

[FEDUKE404]

Explanation of sorts

This is what I was referring to. Perhaps used the wrong word!

Generally, direct cost of reforestation including girdling, herbicide application, baiting of rodents, labor and tool expense, and the planting and seeding equipment depreciation are capital expenditures recoverable through "depletion allowances" when the timber is cut or as adjusted basis if the timber is sold.

We are talking about the same "defined" expenses.

In the years past when my client had such expenses, he could deduct each "years" expenses over a seven-year period (well, actually 1/14 first and last years, and 1/7 the opther years regardless of when during the year the expenses were incurred). IIRC, he also got an Investment Tax Credit for year #1 of each group, which required some adjustment of the allowable expenses (so no double deduction). The "1/7 th" expenses were an annual adjustment to AGI, with IRS code for "reforestation." The ITC came into play on page two of the Form 1040. Once my client no longer had any "new" expenses, he continued to get the AGI adjustment each year until each year "died." (For tracking purposes, I just created a dummy amortization worksheet with a new entry for each year, and tweaked the starting date to make the "1/14ths" come out correct.)

You can somewhat visualize the allowable expenses as being amortized/depreciated S-L over a 7-year period. The ITC was a bit of a bonus. But after each year had run its course, his multi-year "costs" had already been used, hence zero current cost basis.

I think the "reforestation" adjustment was eliminated in recent years, so maybe there is something out there similar to "depletion." I took a quick look at the Form T and there was a lot of "strange stuff" there that I did not recognize.

Apologies for any confusion.

FE

[JON]

Capital Gain

If it is a seldom event, and your not in the business of selling timber. Long term gain. If you are going to do timber operations on a regular basis that will not be available. I am in the same State and have had clients who have "hunting cabins" where they have accepted the thinning of the trees for a few thousand, it also helps the hunting.

[Burke]

There is such a thing as timber depletion. See Pub 535, also perhaps Pub 225 and various articles on the Internet. You must establish a basis for it. As I recall, it is necessary to have the timber appraised prior to first cutting as to its board feet if you decide to use this.