Discussion:Timber sales schedule f or capital gain
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Discussion Forum Index --> Advanced Tax Questions --> Timber sales schedule f or capital gain
Discussion Forum Index --> Tax Questions --> Timber sales schedule f or capital gain
| 26 January 2008 | |
| I have a client who is a beef cattle farmer but lives in a mountaineous region and grazes his cattle on this mountain land. The past 3 years he as started harvesting the timber on the land. He bought his own equipment and he and his employees are doing the cutting, etc themselves and he is selling it to the sawmills/lumber companies. It started out a couple years ago as mostly pulpwood and I reported it on Schedule F. But this year, he has grossed about $72,000 on this venture. I know the equipment he has purchased to do this work is being depreciated on the farm schedule. He says he can't keep it separate from the cattle operation. My question: what should I do with this income? Is it subject to FICA since he does his own cutting and reportable on Schedule F? I believe he even makes the deliveries to the sawmills. Or is it capital income and I need to get the equipment off the farm depreciation? Help. | |
| 31 January 2008 | |
| Yes, it is self employment income, however, he can make an election under Sec 631(a) to treat the cutting as a sale. He will need to file Form T to make this election. In essence, the election puts him on the same footing as a landowner who sold standing timber to a logger. It breaks the transaction into two parts. The first part is the difference between the fair market value of the timber as it stood on the first day of his tax year and his basis in the timber. This difference will get capital gain treatment. The second part is the difference between what he received for the timber at the mill and the fair market value number identified above. This is the self-employment portion.
If he doesn't make the Section 631(a) election, all the income will be treated as SE income. A downside of the 631(a) election is that it is permanent. He cannot choose to use it one year and then not use it the next. Another downside is that the election "to treat the cutting of timber as a sale" means that the gain from timber harvested and not sold will be taxed in the year harvested. | |
| 31 January 2008 | |
| [more timber discussions] | |
| 31 January 2008 | |
| Gscpa, thank you for that very concise summary of the rules. I have a client who harvests roughly once every decade, this year being one, and at year-end planning I was getting reacquainted with those rules. Your summary is a nice overview of that voluminous govt timber guide! | |
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