Record Keeping
ForestTax.com Newsletter

Record Keeping is the foundation to managing your financial data, so that you can accurately track your investment profitability and tax liability. The single biggest error that forestland owners in the US make on their taxes is paying too much in taxes. A good set of records will prevent the error from occurring on your property and keep your money where it belongs - in your pocket.

ForestTax.com Newsletter

Record Keeping and Considerations

It is wise to write, maintain, and update a forest management plan for your woodlands to document your management intentions and actions both silviculturally and financially. For state and federal tax purposes an estimate of expected future profits in the forest management plan is rec-ommended.  Accurate record keeping is essential for all forest landowners. Start keeping records when you first acquire forest land. Keep records of pur-chase price as well as costs of acquisition. These costs include timber cruises, property surveys, attorney fees, and other money spent to acquire the property.

PURPOSE FOR HOLDING TIMBER

Personal Use
Personal use property is held for purposes other than producing in-come. The house and land that serve as a personal residence is an ex-ample. Property held for recreation also is classified as personal use property. No federal and state income tax advantages exist for this ownership classification.
Investment
Investment property includes forest land held for the purpose of producing income at some date in the future through logging, sale, or conversion to another use. Timber production is not necessarily the investor’s principal source of income, but the property is otherwise held for the even-tual realization of a profit. Investors often use a “hands-off” management style. The property might be bought by the investor, but annual management activities and strategies to make the timber grow faster, better, or more profitably often are not completed by that owner.
Trade or Business
Forest land held for use in a trade or business is part of a business endeavor that generates a profit on a more regular basis than in the case of an investment. Individuals are allowed this tax treatment when they take an active role in managing their forest lands

The Internal Revenue Service (IRS) has divided trade or business involvement into two categories: active and passive, based on the landowner’s level of involvement. More tax code advantages are associated with active participation than with passive participation.

Defining Active Trade or Business Interest
The IRS considers forest landowners actively involved if they “materially participate” in significant management of the resource. Landowners must personally participate in forest resource management on a regular, continuous, and substantial basis. The IRS has developed a series of questions taxpayers can use to determine if their activities meet an active trade or business level of involvement. If the landowner can answer “yes” to at least one of the questions, and has evidence to verify that issue, then he or she most likely qualifies for active trade or business tax treatment.

The IRS considers married couples as one individual when determining the “material participation” question. This means that both spouses’ time commitments are counted annually when determining active trade or business qualifications. The IRS will accept informal record keeping practices such as journals, diaries, appointment books, calendars and narrative summaries. But, it is wise to keep track of hours spent managing the resource in a formal record keeping system.

Defining Passive Trade or Business Interest
The IRS defines passive trade or business involvement as a level of activity that is more than just an investment on paper, but less than the level of involvement required for active status. This category of involvement is granted to individuals who take an active role in the management of the property, but might hire others to complete most of the management practices, or simply do not participate on a regular, continuous, and substantial basis.
 
 
 6 Tests of Material Participation


  • The taxpayer participated directly in the activity for at least 500 hours during the tax year.
  • The taxpayer’s participation in the activity constituted substantially all of the participation in the activity.
  • The taxpayer’s participation in the activity included over 100 hours, and no other individual participated more.
  • The taxpayer’s participation in “all significant participation activities” exceeded 500 hours for the tax year.
  • The taxpayer has materially participated in the activity for any 5 of the past 10 years.
  • The facts of the situation indicate that the taxpayer participated in the activity on a regular, continuous, and substantial basis during the year.

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Kamiak Econometrics, a Division of Kamiak Ridge, LLC