This is the fourth and final post in a series covering timber tax basics. Part 1 discussed timber activity classification and how classification affects timber taxation. Part 2 covered calculation of cost basis, capital accounts, and the reforestation deduction. Part 3 explored the taxation of timber sales. This post (Part 4) will explore completing IRS Form T.
The IRS has a special tax form, Form T (Forest Activities Schedule), that most timber owners are required to file with their tax return. Form T is an informational form because it reports information such as land basis, timber basis, and timber sales. The actual tax liability from timber sales is calculated elsewhere on the tax return.
Who Must Complete Form T
A timber owner must complete Form T if he claims capital gain treatment for timber sales under IRC § 631(a) or (b), or if he claims a depletion deduction. These filing requirements will apply to most timber owners in years when they sell timber.
However, the IRS does not require a timber owner to complete and file Form T if he is an “occasional” seller of timber (one or two sales every three or four years). Even though the IRS may not require Form T, it is still good practice to complete Form T because the form tracks most of the necessary and useful information for a timber owner’s operation.
Part I – Acquisitions
Part I of Form T must be completed if any timber, forest land, or timber-cutting contracts were acquired during the year. In this instance, “acquired” refers to obtaining the land by any means, whether by purchase, gift, inheritance, exchange, or some other method.
Part I requires information about the acquired property such as location, seller identity, and the total cost of the property. A timber owner must also allocate the total cost between land, timber, and improvements (see Part 2 for further details about cost allocation).
Part II – Timber Depletion
Part II of Form T calculates timber depletion, which is similar to calculating the cost of timber sold. Part II must be completed for each timber account or block that changed in value during the year. An owner of timberland will likely complete this part of Form T every year because timber values change frequently. Reasons for timber values changes include cutting, additional growth, casualty losses, or transfer from other accounts. These are just examples and there are many more ways timber accounts can change value.
Part II requires information about the quantity and cost of timber. This information is used to calculate a depletion rate. The depletion rate is the cost of timber per a certain unit, such as thousand board feet (MBF), tons, or cords.
The bottom section of Part II must also be completed if a timber owner is electing capital gain treatment under IRC § 631(a). IRC § 631(a) generally applies to timber owners who cut their own timber or pay someone to cut it for them. If a timber owner is making an IRC § 631(a) election, the appropriate box must be checked at the bottom of Part II. Qualifying standing timber sales are eligible for capital gain treatment under IRC § 631(b) and do not require a box to be checked on Form T. For a refresher on the IRC § 631 election and paying less tax on timber sales, see Part 3.
Part III – Profit or Loss from Land and Timber Sales
Part III calculates profit or loss from timber sales or forest land. This section must be completed if a timber owner sold or otherwise disposed of timber, forest land, or timber-cutting contracts.
Part III requires information about the property sold, who the purchaser was, and the sale price. Part III also incorporates timber depletion calculated in Part II in the column “Cost or other basis per unit.”
Part IV – Reforestation and Timber Stand Activities
Part IV summarizes expenses incurred in reforestation and timber stand activities, as well calculating any allowable deduction for Qualified Reforestation Expenditures. Reforestation expenses are costs incurred for reforestation by planting seeds or seedlings. Reforestation expenses also include other related direct costs, such as land preparation, planting labor, and cost of planting tools. “Timber Stand Activities” are expenses incurred to manage a timber stand, regardless of its age. Common timber stand activities include burning, spraying, pruning, thinning, fertilizing, and weed control.
Part V – Land Ownership
Part V is the shortest section of Form T and is completed if any changes in land ownership occurred during the tax year. This section applies to the land account only.
Conclusion
This post is a brief overview of Form T and how it applies to the average timber owner. Actually completing Form T is more difficult and will vary depending on the size and scope of a timber owner’s operations. A timber owner should consult with a knowledgeable timber CPA for how to complete Form T for his specific situation.
Questions about completing Form T or any other timber tax issues? Contact Andrew!
