Timber Taxation for Forestland Owners CLINT BENTZ CPA

Timber Taxation for Forestland Owners CLINT BENTZ, CPA, CMA BUSINESS NAVIGATORS, LLC 38620 LULAY RD SCIO, OR 97374 CLINT@BISNAV. COM Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 1

Overview of Course (Seven Weeks) March 9: March 23: March 30: April 13: April 27: May 11: May 25: Overview of Timber Taxation & Deducting Casualty Losses How You Are Classified Determines How You Are Taxed Reporting Income Deducting Expenses Capital Expenditures Choosing a Form of Business and Other Tax Issues Understanding Oregon’s Property & Harvest Tax Programs Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 2

Week 4 Outline §Costs Everyone Can Deduct § Harvest Costs § Sale Expenses §Costs Deductible Based On Taxpayer Classification § Carrying Costs § Development Costs § Costs Related to Residences on Property Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 3

Week 4 Outline, Continued §Costs Only Deductible By Trade Or Business Taxpayers § Repairs and Maintenance Costs § Home Office Deduction § Mileage and Vehicle Costs § Operating Costs Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 4

Harvest Costs – For Sales of Logs §What are Harvest Costs? §Harvest Costs are only borne by sellers of logs §Harvest Costs can include harvest taxes §Personal-use and investors net costs to log income on 1040 §Taxpayers electing 631(a) deduct as Cost of Goods Sold §Personal-use cannot report a loss on sale Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 5

Sale Expenses – Sales of Logs or Timber §What are Sales Expenses? §Personal-use and investors net costs to log income on 1040 §Taxpayers electing 631(a) deduct as Cost of Goods Sold §If selling standing timber, add to depletion deduction as cost §Personal-use cannot report a loss on sale Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 6

Carrying Costs §Property taxes § Personal and investor SALT Limit $10, 000 § Investor can capitalize with IRC 266 / Reg 1. 266 -1(c)(2)(i) election § Trade or business deduct as operating cost §Mortgage Interest § Personal-use limitations in 2017 TCTA - $750, 000 mortgage § Investor deduct on Sch A as investment interest subject to limits § Investor can capitalize with IRC 266 / Reg 1. 266 -1(c)(2)(i) election § Trade or business deduct as operating cost subject to limits Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 7

Carrying Costs, Continued §Property insurance and routine property costs § Personal-use – Non-deductible § Investor – 2% Misc Itemized Deduction – eliminated by 2017 TCJA § Investor – Can elect to capitalize under IRC 266 / Reg 1. 266(c)(2)(i) § Trade or Business deduct as operating cost Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 8

Development Costs §What are Development Costs? §Personal-use – added to cost basis §Investor – 2% Misc Itemized Deduction – 2017 TCJA eliminated §Investor – Capitalize with permanent election under IRC 266 / Reg 1. 266 -(1)(c)(2)(ii) §Trade or business deduct as operating costs Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 9

Costs Related to Residences §Principal residence, vacation home, ee housing or rental §If personal residence or vacation home § Only property taxes and mortgage interest deductible § If owned by entity, expenses are non-deductible. May be passed out to owners of partnerships and S-corps as separately stated items § Capital improvements may be capitalized but not depreciated §If rental, reported on Sch E (individuals) or 8825 (entities) §Rental activities are passive by definition, not subject to SE Tax Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 10

Vacation Home Rules §If vacation home is rented less than 15 days per year: § Property is considered a personal residence. § Rental income is not taxable. Rental expenses not deductible. § Interest and property taxes deductible based on personal rules. §If property is rented to others and personal use is more than the greater of 14 days or 10% of the total days you rent to others at a fair price, the property is considered a personal residence. If a personal residence, you cannot deduct rental expenses in excess of your rental income. Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 11

Property Rented Over 15 Days §If the property is rented more than 14 days: § All rental income is taxable. Deductible rental expenses pro-rated based on days rented vs total days occupied. § The pro-rata portion of deductible expenses are deducted in the following order: 1. Interest, property taxes and casualty losses; then 2. Operating expenses other than depreciation; then 3. Depreciation § Expenses in categories 2 and 3 cannot be used to produce a loss if the property is a personal residence. Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 12

Short-Term Rentals (Airbnb, VRBO) §If rentals are short-term, activity is a trade or business § 7 -day and 30 -day rules based on average length of stay, or § Owner provides extraordinary personal services §Reported on Schedule C, subject to self-employment tax §Subject to passive loss rules. May aggregate with other passive activities for purposes of counting hours worked. Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 13

Repair and Maintenance Costs §Costs of “keeping property in good working condition without increasing its value or prolonging its useful life” are deductible §BRA: Betterments, Restorations, or Adaptions are capitalized §Betterments: § Fix a pre-existing defect when purchased § Fix a manufacturing defect § Enlarge or expand property so it has more capacity § Increase property’s quality, strength, efficiency or productivity Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 14

Repair and Maintenance Costs §Restorations: § Restore deteriorated property to “ordinary efficient operating condition” § Replace a major component or substantial structural part § Rebuild the property to like-new condition § Result in a deductible loss §Remaining basis of replaced component can be written off without depreciation recapture Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 15

Repair and Maintenance Costs §Adaptions: § Change how property is being used § Adapting a unit of property to a new or different use not consistent with the ordinary use of the property when placed in service Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 16

Repair Costs “Safe Harbor” Elections §Small Invoices § Line-Item or invoice cost is $2, 500 or less §Small Projects § Total amount paid is lesser of $10, 000 or 2% of unadjusted cost basis §Routine Maintenance § Repairs are regularly recurring activities, § Repairs result from wear and tear of being used in the business, § Repairs are necessary to keep property operating efficiently, and § Repairs are necessary more than once during life (10 yrs for buildings) Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 17

Home Office Deduction §IRS Pub 587 §Must use part of your home exclusively and regularly § Can be a separate room or separately identifiable space § Qualifies if used exclusively for administrative/management activities §Two methods – Simplified and Actual Cost §If only used for part of year must pro-rate costs Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 18

Simplified Method §Multiply area used in home (not to exceed 300 sq ft) by $5 §Cannot exceed net income from business §Deducted on Schedule C §Elect Simplified method annually by using it to compute the deduction §No carryover of unused deduction to the following year Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 19

Actual Expense Method §Business percentage is space used / total sq footage §Divide home expenses into Direct, Indirect, and Unrelated §If itemize, can use deductible portion of home expenses §Cost of basic telephone service not deductible §Depreciation allowed or allowable per Pub 587 §Deduction cannot exceed business income, can carry over unused expenses to following year Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 20

Mileage and Vehicle Costs §Standard Mileage rate or Actual costs §Standard mileage rate § Can’t use if have five or more cars § Can’t have claimed a depreciation deduction other than S/L § Can’t have claimed Section 179 or bonus depreciation § Can’t have used actual expenses for leased auto § Must choose in first year car is used in business, can switch later § For leased cars, must use during entire lease period Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 21

Actual Cost Method §First must determine actual operating costs, then pro-rate between business and personal use based on mileage §Parking fees and tolls are deducted separately §Must substantiate both expenses and business miles §Commuting miles are not business miles. Home office! Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 22

Operating Costs §Operating costs are not required to be capitalized (IRC 263 A) §Silvicultural costs not related to reforestation are deductible §All other ordinary and necessary business expenses § Dues, education, fuel, contract labor, legal and professional fees § Meals – 50% of qualified meals expenses § Wages §Filing Form 1099 -NEC for payments for services Copyright © 2021 Business Navigators LLC, Unpublished, All Rights Reserved 23