Every forest landowner should properly report basis on Form T.
This is the fifth and final article in the Back to Basis Series. Previous articles have explored what basis is and why it matters, how to calculate an accurate timber basis under different scenarios, saving taxes with qualified reforestation expenditures, and how to setup and maintain timber capital accounts.
What is Form T?
Form T, also known as the Forest Activities Schedule, is an IRS form that most forest landowners are required to file with their tax return.
Form T is mainly an information form, meaning limited tax calculations are performed on the form. However, the form provides useful information to the IRS regarding a forest landowner’s activities during the year, such as land acquisition information, timber depletion calculations, timber sale profit calculations, and reforestation activity information.
Who Must File Form T
According to the Form T Instructions, a forest landowner must file Form T if he meets one of the following requirements: (1) claim a depletion deduction, (2) make a capital gain election under IRC § 631(a), or (3) sell timber under IRC § 631(b).
If a forest landowner harvests timber, he is most likely required to file Form T for that tax year. However, the IRS does not require a forest landowner to file Form T if he is an “occasional” seller of timber. The IRS defines “occasional” as “one or two sales every three or four years.”
Even though the IRS may not require Form T, a good practice is to complete Form T every year (even if not filed with the tax return) because the form tracks most of the necessary and useful information for a forest landowner’s operation.
Basis and Form T
Two sections on Form T are important from a basis perspective: Part I – Acquisitions and Part II – Timber Depletion.
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 forest landowner must also allocate the total cost basis between land, timber, and improvements.
Part II – Timber Depletion
Part II of Form T calculates timber depletion. Depletion is a tax deduction for the cost basis of timber sold.
Part II must be completed for each timber account or block that changed in value during the year. An forest landowner will likely complete this part of Form T every year because timber values change frequently. Reasons for timber value changes include cutting, additional growth, casualty losses, or transfer from other timber accounts.
Part II requires information about the quantity and cost of timber, which is used to calculate a depletion rate. A 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 forest landowner is electing capital gain treatment under IRC § 631(a). IRC § 631(a) generally applies to forest landowners 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.
Conclusion
Every forest landowner should properly report their basis on Form T.
Parts I & II of Form T are especially important for basis because they track the cost basis of timber, as well as the timber depletion calculation.
Questions about basis or Form T? Contact Andrew!
