"Farming"--produce, trees, firewood, tractor work

[lakngulf]

Now that I am retired I am considering transferring some hobbies into some income, and "farm" deductions. I own about 100 acres (70 woods, 30 pasture) and want to produce some income producing products. I grow lots of tomatoes, peppers, etc and usually just give them away. I would still do that, but could sell a few as well. I have lots of hardwoods that need to be cut and could produce great firewood. I do some tractor work, have some trees that need harvesting. I also do a lot of planting for wildlife, and could "sell" hunts instead of giving them away.

Would that be a "farm" business? What steps should I take? I would like to get things in order before some timber harvest next year, so that I can use the proceeds in a good way to improve equipment. Also, already have tractor and implements. How do they come into play? Depreciation on already owned equipment? I am sure that repairs and new equipment would qualify as expenses? What should I do?

 

[dmccarty]

Check with your state extension office about this subject. They should have loads of information. Timber taxes is not hard but it is different. When I bought our place, I talked with some CPA's about timber taxes and I knew more about the subject than they did. We bought land and in the same year sold the trees which makes the tax situation a bit easier. I created our own timber management plan, the NC Forestry department will do one for you but you have to wait your turn, and at the time, I did not have the time to wait because of taxes. With a management plan and the timber harvest I was able to get our land into a timber valuation which really decreases our property tax. Our property tax increased dramatically after we bought and if we had not been able to get a timber valuation we would have had to sell land because of the tax burden.

There is a magazine, https://www.sawmillmag.com/app/home/index, that I subscribe too that covers small wood lot management. The magazine has reviews of portable sawmills, cord wood processors, etc. Making money off of trees is hard work and takes a fair amount of equipment. As a teenager, I worked for a guy who logged is land for the good trees and then was taking the leftover trees and making fire wood to sell in the city. I split several house sized piles of wood one summer, loaded the wood into trucks, and offloaded it at a staging area in the city. Then I helped deliver and stack the wood at the buyers home. Looking back, I wonder how he made money. :laughing:

I think the easiest thing to do, if the trees are marketable, is to log them. To do that, go back to the extension office and talk to them. Also get a timber agent or forester to help cruise the trees to get an inventory, sell the trees, oversee the logging and maybe create a timber management plan.

There is a guy I drive past that has a dump truck and backhoe service. I watched him for years hauling trees and stump home and filling in a low spot. He then brought in loads of dirt and covered up the trees and stumps. For the last several years he has been growing a huge number of tomatoes over that filled in area. I don't know where he sold the tomatoes when he started but he now has a little road side stand. For as many tomatoes as he grows, I can't believe he sells them all through the road side stand. We do have several farmers markets in the area so I assume he sells at the markets.

You can lease your land for hunting. The NC Extension office has information about leasing land for hunting. I don't know if you will make much money on the lease since it is very location specific.

I see some people raising cattle that they then sell by the quarter. I don't know if they make much money but it does give them a tax write off and property tax reduction. TBN has plenty of old discussions about raising cattle for money.

Later,
Dan

 

[smstonypoint]

"You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant," according to the IRS. In case you are audited, you would have to show that you are not filing Schedule F as a hobby farmer.

You can consult Publication 225, Farmer's Tax Guide to acquaint yourself with the tax implications, but it would probably be a good idea to use an accountant as you proceed with your plans.

You should be able to initiate depreciation of the equipment that you own. New equipment may be expensed if it qualifies for Section 179, otherwise it can be depreciated.

What sort of timber harvest are you talking about? Selling standing timber? Selling firewood?

Selling standing timber would allow you to treat your net (sales -sales expenses - basis) as a capital gain, with tax rates varying form 0 to 20% depending on your ordinary income tax bracket. You should seriously consider hiring a consulting forester if you are selling standing timber.

The tax consequences of selling firewood from your timber would require additional research, but I think your income could be treated as part a capital gain (sale of the standing timber) and part as ordinary income. I have seen this issue come up when property owners do their own logging, but I am hazy on the details.*

Good luck.

Steve

* Edit. I did a little research on this question, but I remain unsure about the answer.

From Timber Sale Tax Treatment | Missouri Department of Conservation,

"Timber owners who cut timber for use in their trade or business can, under certain conditions, obtain capital gains treatment by "electing to treat the cutting as a sale." This is the so-called Section 631(a) treatment. In simple terms, the owner "buys" the timber from himself and then sells it back to his trade or business......

Proceeds from the sale of forest products other than standing timber are treated as ordinary income. This includes logs, lumber, pulpwood, poles, mine timbers, maple syrup, nuts, bark, Christmas greens and nursery stock. In addition, income from the sale of firewood or pulpwood produced from the limbs and tops of trees is ordinary income."

From Publication 225 (2013), Farmer's Tax Guide

"Standing timber you held as investment property is a capital asset. Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. If you held the timber primarily for sale to customers, it is not a capital asset. Gain or loss on its sale is ordinary business income or loss. It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). See the Instructions for Schedule F (Form 1040).

Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc., are ordinary farm income and expenses reported on Schedule F.

Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract."

 

[lakngulf]

Thanks for the replies. I appreciate the links for further reading. I think my plan would be a smorgasboard approach. Will have to do quite a bit of research and see if I can put it together. I have about 100 acres, timber cut in 2014, and continuous firewood cutting/selling is a live possibility. If I do any veggie farming I would want to wholesale to some existing local roadside stands. Could possibly add growing oak trees for wildlife planting--I grew about 300 for myself and they did pretty good.

I may not have enough to make it happen, but at least I have time to do the study.