Are there ways to leverage the fact that a property produces regular income, albeit small in relation to its value, for further benefit? For example, I’ve read much about timber tax. Landowners can deduct expenditures related to management, maybe even including cost of visiting the property, if viewed as an actual timber business. The problem is that timber harvests may be so infrequent for a small landowner that it illegitimizes his claim as a “business.” Does that change if a landowner has 40 acres of tillable with a yearly income? Can I magically begin being viewed as a real business with real expenses that I can then deduct?
And, yes, I know free accounting advice is worth less than you pay for it. I’m not looking for you to give me free accounting advice but rather guide me on specific things to ask my accountant about. Give me enough knowledge to start that conversation. Or enough to know I’m way off base. Tia
We have a pine farm and run it as a business. We formed an LLC. Profits and losses are passed through to the owners through a K1. Yes, you can, and we do, deduct expenses related to maintaining the property. We have a forest stewardship program in place written by a forester that includes practices that benefit Wildlife. We also participate in USDA programs to do cost sharing.
The following is general information and I'm no accounting expert by any stretch:
You can deduct business expenses in any business. The problem when it comes to taxes is the question, is it a business or hobby? Well, generally, the difference is profit. If a small business is generating losses year after year, eventually, the IRS decides that is is really not a business, it is a hobby and then disallows all those expenses you wrote off in previous years. A tax person can tell you how long you can show losses before the IRS takes action.
That is where timber comes in. There are different cycles and approaches for timber rotation that are common practice in the industry. Some may use fairly short cycles, clear-cut, and harvest pines and replant every 10 or 15 years for pulp. Or you may have a commercial thinning (given you have enough acreage to interest a logging company) after 10 or 15 years and then wait longer and clear-cut for pole timber. Or you may have a second thinning and wait even longer to sell pines as saw-logs.
Timber prices fluctuate over time and strategies may change over time as well. The bottom lines is that in a business like this is not uncommon to show losses for many years before the cumulative profits exceed the cumulative losses. It is just the nature of the business that growing trees takes decades. I think the IRS gives more grace to businesses where the nature of the business takes a long time to become profitable.
Irrespective of the timeframe, a business has to be profitable or the IRS will declare it a hobby and there will be tax consequences.
Keep in mind that a single business can have many aspects. So, one could have tillable ground that you plant and sell crops from or that you lease to someone. They could also have a couple hundred acres of pines that they manage. The IRS does not care how large your profit is, just that you have a profitable business. You don't have to maximize profit. For example in our case, we are striving for a balance between timber profit and wildlife benefit. There are many standard practices that reduce profit. For example, it is a common, and considered best, practice to leave a riparian buffer around creeks that is not harvested for the purposes of improving water quality. There are many other conservation practices that are encouraged that benefit wildlife. By putting a forest stewardship plan in place that documents and defines the way we manage or timber, we are able to legitimately deduct expenses associated with these wildlife beneficial practices. But, one again, in the long-run, not to exceed profits.
Thanks,
Jack