It’s that time of year again! Let’s hope you won’t be like Homer Simpson, scrambling to put numbers on the federal income tax return, rushing to the post office, and tossing the envelope in the mail bin at the last minute on Tax Day. While many of us only think about taxes during tax season, for private forest landowners, every forest management decision could have tax implications. Understanding the tax consequences, taking advantage of the preferential tax provisions, and integrating tax planning into forest management decisions are crucial.
Forest landowners may generate income not only from timber but also from various nontimber forest products. Timber income generally qualifies for the preferential capital gains tax treatment if the holding period requirement is met. However, is income from nontimber forest products treated similarly to timber income for federal income tax purposes? This is the topic of today’s article.
If you are interested in timber taxes, please refer to the timber tax tips for 2023: https://www.timbertax.org/publications/fs/taxtips/TaxTip2023.pdf.
Defining nontimber forest products for tax purposes
Nontimber forest products generally refer to goods harvested or derived from forests for purposes other than timber. They may include tops, limbs, twigs, branches, roots, tubers, bulbs, leaves, bark, fruits, nuts, tree sap, mushrooms, and other fungi, and in some instances, entire plants.
Note that the IRS definition of timber differs from the term used by a forester. For tax purposes, timber generally means standing trees suitable for commercial production of wood products. Under certain tax provisions (e.g., gain or loss from the disposition of timber under Section 631), timber also includes Christmas trees (i.e., evergreen trees aged six years or older when severed from roots and sold for ornamental purposes). Therefore, nontimber forest products, for tax purposes, have a broader scope than their definition in forestry.
Character of income from nontimber forest products
Not all types of income are treated equally for tax purposes. The character of income may determine whether it’s subject to certain taxes (e.g., self-employment tax, net investment income tax), which loss deduction rules to follow, the allowable amount of certain deductions, and the applicable tax rate.
With a few exceptions, net profits from the sale of most nontimber forest products generally are taxable as ordinary income. If the income is derived from your material participation in a trade or business (including a farming business), it is subject to self-employment tax.
Sales of the following nontimber forest products normally generate ordinary income:
- Logging residues left behind after a timber harvest and sold separately from the original timber sale. Products such as pulpwood from tops and limbs, wood mulch, wood chips, and firewood may be made from these logging residues. While income from the original timber harvest might qualify as capital gains, income from the sale of these byproducts is ordinary income. The sale of tree stumps is normally considered ordinary income (see below for an exception).
- Christmas trees harvested before reaching six years of age.
- Products collected from trees, such as pine straw, maple sap, walnut sap, evergreen boughs, pinecones, fruits, and nuts.
- Living trees, such as seedlings, balled-and-burlapped trees, living ornamental trees, and living fruit or nut trees.
- Products from annual plants and mushrooms in forests, including mosses, lichens, vines, herbs, wildflowers, ramps, beargrass, and mushrooms.
- Products derived from some perennial plants but not the final harvest. For example, some ginseng growers sell the leaves and stems of the plants annually before harvesting the roots.
On the other hand, long-term capital gains could be generated in these cases:
- The sale of tree stumps from cutover land purchased years ago as an investment by a taxpayer not in the timber or tree stump business.
- The final harvest sale of cultivated perennial plants. Examples include American ginseng, black cohosh, and goldenseal. Income from the sale of these products’ roots can qualify as capital gains.
Reporting expenses and income from nontimber forest products
Depending on the extent of your involvement in the production of nontimber forest products, your nontimber activities may qualify as a trade or business. Especially, forest farming operations is inherently a business because it is the intentional and intensive management of forested lands to produce nontimber products and is .
Ordinary and necessary expenses related to the gathering, growing, processing, or marketing of nontimber forest products are deductible. Nontimber forest products producers who qualify as material participants in a trade or business should report the deductible expenses on Form 1040, Schedule C or F, as appropriate. Expenses incurred to establish forest perennials are capital expenses. They can be recorded in a capital account and deducted from the gross proceeds when the plants are harvested and sold. Material participants in a trade or business should report ordinary income from nontimber forest products on Schedule C or F (Form 1040), as appropriate, and report capital gains on Form 4797.
Forest owners classified as investors should report ordinary income from nontimber forest products as “Other income” on Form 1040, Schedule 1, and report capital gains on Form 8949 and Schedule D (Form 1040). Prior to 2018, investors report deductible expenses as miscellaneous itemized deductions on IRS Form 1040, Schedule A, where they will be subject to the 2 percent of adjusted gross income floor. However, the miscellaneous itemized deductions are suspended for 2018-2025 because of the 2017 Tax Cuts and Jobs Act.
Conclusions
Many private forest landowners generate income from nontimber forest products. While the income serves as a supplement to timber income for some forest landowners, for others, it may be their primary source of income. With a few exceptions, most of the income from nontimber forest products is taxable as ordinary income for federal income tax purposes. Ordinary and necessary expenses associated with the production of nontimber forest products are deductible. It is critical to keep records of these expenses to support your profit motive and substantiate your deductions.
This article is for informational purposes only and is not intended to provide financial, tax, or legal advice. Please consult your own tax advisor concerning your particular tax situation.
Li, Yanshu. “Tax Considerations of Income and Expenses from Nontimber Forest Products.” Southern Ag Today 4(14.3). April 3, 2024. Permalink
