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Back in May we had several large trees removed in the back yard. A small logger came in behind the tree service and hauled a couple small loads of pine for us to recoup some of the cost. We received a form (1099-SA) I think, from the timber co.

The net transaction on our end, counting the tree service, was around -$3000. I have the receipt for the removal.

Maybe someone has had a similar situation. Wondering if we actually owe on the "income". I'll end up consulting a tax pro on this before filing, just curious as to your thoughts.

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I’ve never sold timber. But trees are a crop just like corn or any other ag crop and any profit would be taxed. When one sells a house or property the government taxes any capital gains. One pays tax any interest from money one has in a savings account that was already taxed when you earned it.

Income is taxed doesn’t matter where it comes from.
 

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Back in May we had several large trees removed in the back yard. A small logger came in behind the tree service and hauled a couple small loads of pine for us to recoup some of the cost. We received a form (1099-SA) I think, from the timber co.

The net transaction on our end, counting the tree service, was around -$3000. I have the receipt for the removal.

Maybe someone has had a similar situation. Wondering if we actually owe on the "income". I'll end up consulting a tax pro on this before filing, just curious as to your thoughts.

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It was probably a 1099-MISC. Was the amount in box 7? Or was it box 3?

I want to be clear on your comment about the "net transaction". Did you end up with a net of $3000 out of pocket? In other words - it cost $5000 to cut down the trees and the timber company gave you $2000.... so you're still out of pocket $3000 even after the timber company paid you?

If you're truly net out of pocket on this deal, you'll owe no money on the money received from the timber company. All you did was sell a personal item (logs laying on the ground) for less than you paid for it. Kind of the same idea as a garage sale. But, since it's a personal item (assuming you're not in the timber business), you also cannot take the $3000 as any sort of loss. (NOTE: There could be an exception to this if you had to remove the trees due to some sort of natural disaster, but...)

Here's the kicker though - even though you won't owe any tax money on the transaction (assuming you were net out of pocket), you still need to report this on your tax return somewhere since the timber company gave you a 1099. I would probably report it on the "Other Income" line of your 1040 (line 21?). You can try and squeeze in something like "Amt rptd on 1099 - $2000, less expenses incurred - $5000" and put "0" in the amount box. Or you can write "See Attached" and then write up a narrative explaining the situation and include it when filing the return.

Let me know if I misunderstood your comment about "net transaction". :good2:
 

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I suspect that they sent you a 1099-S. (a 1099-SA is for distributions from a Health Savings Account!)

You'll have to claim that income but essentially, you had a little business activity for the year. You should be able to canx out that income with the expense of the tree cutting service. It all just means that you'll have more forms to fill out this year than you usually do.
 

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Selling timber

Trees are a crop as mentioned above but there are some sections of the tax code relating to timber sales. I'm not sure they apply in your case since I think you can argue that the sale is a function of removal of the trees but here some of the code as I remember it. Timber sales are one reason I quit doing my own taxes and now pay an accountant so I could be a little out of date with some of this. I grow trees as a business so I'm not sure how much of this applies to your situation.

Timber can be treated as a long term capital gain depending on the length of time you owned the trees. Like any capital gain the taxable income is the sale price minus the expense of the sale minus the basis. The basis for timber is frequently zero but if you bought a tract of timber 5 years ago and sell it today there would be a basis available. On the other hand if you started the trees from seedlings, expensed the reforestation costs as ordinary expense your basis will be zero.

There is a cap on the amount of reforestation cost that can be expensed per year. It was $ 7,500 but that may have changed. Large timber companies that regularly incur costs over the cap may include the reforestation costs as part of the basis rather than expensing the cost in a year.

If you haven't owned the trees long enough to qualify for capital gain treatment, then they are treated as ordinary income. That may be true anyway if this is a one time sale incidental to owning your home.

In any case, I would definitely ask your tax advisor if you can deduct the cost of removing the trees from the amount your received from the company. If so, you may have no taxable gain at all.

Treefarmer
 

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It was probably a 1099-MISC. Was the amount in box 7? Or was it box 3?
Real Estate Transactions and Timber Sales are reported on Form 1099-S.
 

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I’ve never sold timber. But trees are a crop just like corn or any other ag crop and any profit would be taxed. When one sells a house or property the government taxes any capital gains. One pays tax any interest from money one has in a savings account that was already taxed when you earned it.

Income is taxed doesn’t matter where it comes from.
In most cases, if someone sells their house that was their principle residence for a specified period of time, they pay no capital gains on it. If you sell a rental property, you would pay taxes on any gain recognized on the sale.

Also, trees aren't a crop like any other ag crop. Most ag crops (corn, beans, wheat) are planted and harvested within a year. They are usually under the control of the same person (the farmer) for the entire planting/growing/harvesting process. Trees take many years between planting and harvesting. It's not unusual for the land on which there is a stand of timber to change hands multiple times during the growing process. That means that the process of calculating the basis (ie - cost from which the net profit is determined) of the timber is much different than figuring the basis of a corn or bean crop. And since tax is paid on the profit (selling price - basis), figuring the basis is all important!

While your statement about "Income is taxed doesn't matter where it comes from" is basically correct, it is waaay oversimplified. Income will be taxed, but it's taxed in different ways. For example, if you have a little business on the side (or you're totally self-employed), your business income is subject to "self-employment tax" (SE tax), which is essentially the Social Security tax that is normally withheld from your paycheck. If you have a couple of rental properties, generally the rental income is not subject to SE tax. If you sell a stock at a gain and you've held it for a specified period of time, that income is taxed at a capital gains rate which may be less than your marginal bracket for your wage income. And, if you sell a stock at a loss, or have a loss in your business, you can deduct that loss from your other income, whereas if you have a loss from selling a personal item, you cannot deduct that loss.

I'm not trying to start an argument, just trying to say that when giving tax "advice", there's a lot to it.

The bottom line is that the OP should consult a TAX PROFESSIONAL which isn't necessarily the person at HR Block or in the little Jackson-Hewitt cubicle that pops up in the entrance at Wal-Mart this time of year. Hopefully my other post at least gives the OP some information that he can research if he decides to prepare his own return.
 

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I would probably just pay the tax on the amount of the 1099SA. Probably cost less than having a pro do your taxes. But without knowing how much your tax liability is, only you can decide.

Did you pay $3700 and sell timber for $700 and owe on $700? 20% bracket would be $140

Or pay $10,000 and sell timber for $7,000 and owe on $7,000? big difference on what you would owe. 20% bracket would be $1400

Pay on the full amount IRS will have no reason to question it.

Pay a Pro and they should handle any questions if the IRS questions it.
 

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Discussion Starter #9
It was probably a 1099-MISC. Was the amount in box 7? Or was it box 3?

I want to be clear on your comment about the "net transaction". Did you end up with a net of $3000 out of pocket? In other words - it cost $5000 to cut down the trees and the timber company gave you $2000.... so you're still out of pocket $3000 even after the timber company paid you?

If you're truly net out of pocket on this deal, you'll owe no money on the money received from the timber company. All you did was sell a personal item (logs laying on the ground) for less than you paid for it. Kind of the same idea as a garage sale. But, since it's a personal item (assuming you're not in the timber business), you also cannot take the $3000 as any sort of loss. (NOTE: There could be an exception to this if you had to remove the trees due to some sort of natural disaster, but...)

Here's the kicker though - even though you won't owe any tax money on the transaction (assuming you were net out of pocket), you still need to report this on your tax return somewhere since the timber company gave you a 1099. I would probably report it on the "Other Income" line of your 1040 (line 21?). You can try and squeeze in something like "Amt rptd on 1099 - $2000, less expenses incurred - $5000" and put "0" in the amount box. Or you can write "See Attached" and then write up a narrative explaining the situation and include it when filing the return.

Let me know if I misunderstood your comment about "net transaction". :good2:
That's exactly it. We ended up $3k out of pocket. Not looking to claim a loss or anything like that, just thinking of the job in its entirety.

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Thanks for the opinions and feedback. I do work in the timber industry, and I have some idea of the ins and outs, but these jobs are money makers, whereas this job was a net loss.

I'll definitely report the income, but interested to see how the cost for removal should be handled. Not going to be a large sum in either case, but I'd rather not give $1 that I dont have to.

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I’ve never sold timber. But trees are a crop just like corn or any other ag crop and any profit would be taxed. When one sells a house or property the government taxes any capital gains. One pays tax any interest from money one has in a savings account that was already taxed when you earned it.

Income is taxed doesn’t matter where it comes from.
While your statement about "Income is taxed doesn't matter where it comes from" is basically correct, it is waaay oversimplified. Income will be taxed, but it's taxed in different ways. For example, if you have a little business on the side (or you're totally self-employed), your business income is subject to "self-employment tax" (SE tax), which is essentially the Social Security tax that is normally withheld from your paycheck. If you have a couple of rental properties, generally the rental income is not subject to SE tax. If you sell a stock at a gain and you've held it for a specified period of time, that income is taxed at a capital gains rate which may be less than your marginal bracket for your wage income. And, if you sell a stock at a loss, or have a loss in your business, you can deduct that loss from your other income, whereas if you have a loss from selling a personal item, you cannot deduct that loss.

I'm not trying to start an argument, just trying to say that when giving tax "advice", there's a lot to it.

The bottom line is that the OP should consult a TAX PROFESSIONAL which isn't necessarily the person at HR Block or in the little Jackson-Hewitt cubicle that pops up in the entrance at Wal-Mart this time of year. Hopefully my other post at least gives the OP some information that he can research if he decides to prepare his own return.
Mark, actually income is not always taxable, it can be exempt, it can be deferred under the doctrine of constructive receipt, it can be offset with expenses, it can be "traded" with permitted IRC code exchanges (Sections 1032, 1035, 1036, 1038, 1041, etc) and I am sure I am forgetting other legal methods as I type this. So while I am not looking to start an argument about this with either you or the person who made this statement, which I have included in this response, the statement that all income is always taxed is what I have spent my professional career, very successfully, challenging and devising legal methods to either delay or avoid the taxation all together.

So, I would say "That while all income must be recognized as required in the law, it's very possible you may not have any actual tax obligations as a result of the reporting of the income".........I would imagine that you and I are in agreement on this and likely the above issues as well........

You are ABSOLUTELY correct about the Jackson Hewitt, H&R Block and other part time seasonal tax preparers. Those firms are fine for someone with an "EZ filing" or very basic tax situations, But when you get into more detailed matters, it's best to seek a full time professional with expertise in the area of question.


That's exactly it. We ended up $3k out of pocket. Not looking to claim a loss or anything like that, just thinking of the job in its entirety.

Thanks for the opinions and feedback. I do work in the timber industry, and I have some idea of the ins and outs, but these jobs are money makers, whereas this job was a net loss.

I'll definitely report the income, but interested to see how the cost for removal should be handled. Not going to be a large sum in either case, but I'd rather not give $1 that I dont have to.
From the limited information you have provided, it sounds to me like you have an actual loss, which should be recognized to the extent possible with your tax situation. There is nothing wrong with taking a loss if you are legally entitled to it. After all, if you are required to claim income, you are entitled to offset the same with qualifying and eligible expenses.

How this is handled depends upon many things including your tax filing status and your employment situation. If you work in the timber industry, this should be a business expense which you can recognize to offset the impact of the $3,000 form 1099. When you spend $7,000 to "earn" $3,000, that's very different than many of the situations where the 1099's are used to report income. The $7,000 is the actual expense and the income reduced your expense to a net $4,000, but that's the expense which you should be able to take, certainly if you are filing a Schedule C or other business profit and loss.

A full time tax professional with practice experience in this field should be of assistance to you on this matter.

Also, as Mark02tj mentioned, while you will have to claim the form 1099 as the issuer of it has certainly notified the IRS of the matter, the income should be able to offset as the transaction did not provide you with a taxable gain, it just minimized your actual out of pocket expense on the matter.

One thing is for sure, there is no faster way to get on the IRS's radar screen than to fail to include a source of income reported to you on one of the required schedules which are filed in such transactions.......This is exactly what the law was enacted to create, a paper trail which requires disclosure and recognition which matches the records the IRS receives.

I believe in paying the EXACT amount of your tax liability, after taking full advantage of the laws and the IRC code, not $1 more.........One thing you can bet your life on is that I would rather spend hours filling out paperwork than pay taxes which I am not required to just because paying the tax is "easier". I simply don't get that.........I know several people who have gotten letters from the IRS indicating a discrepancy and the IRS stated they thought the person owed an amount of money and often, the people just write the check and pay it, without even looking into the matter. I have caught many errors over the years on this specific issue where the taxpayer in fact did not owe any money.........It's always worth verifying the actual liability.
 

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Should be no net income

Thanks for the opinions and feedback. I do work in the timber industry, and I have some idea of the ins and outs, but these jobs are money makers, whereas this job was a net loss.

I'll definitely report the income, but interested to see how the cost for removal should be handled. Not going to be a large sum in either case, but I'd rather not give $1 that I dont have to.

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I would ask a tax pro but I think you don't have any taxable income if it cost you more to get the timber to the mill than you received in pay for it. Since it isn't a business for you, I also don't think you can deduct the loss.

The issue that might come up should you ever be audited was is whether the bill you paid was for work unrelated to getting the timber to the mill. Therefore I would ask a tax pro but my guess is they will say save all the paperwork but don't report any net income as you didn't have any net as opposed to gross income from the sale.

Treefarmer
 

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I would ask a tax pro but I think you don't have any taxable income if it cost you more to get the timber to the mill than you received in pay for it. Since it isn't a business for you, I also don't think you can deduct the loss.

The issue that might come up should you ever be audited was is whether the bill you paid was for work unrelated to getting the timber to the mill. Therefore I would ask a tax pro but my guess is they will say save all the paperwork but don't report any net income as you didn't have any net as opposed to gross income from the sale.

Treefarmer
If anyone should know about the timber business, a guy named Tree Farmer would be where I would start.......:good2::bigthumb:.:laugh::lol:

Hope all is well in your part of the world.
 

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We're doing well, thanks

If anyone should know about the timber business, a guy named Tree Farmer would be where I would start.......:good2::bigthumb:.:laugh::lol:

Hope all is well in your part of the world.
LOL, I can grow em but turn the tax part over to an accountant. I do know that sales expenses can be used to offset the gross income- it's a normal practice.

Treefarmer
 

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This should not be that complicated.

Every business now is required to issue some form of 1099 to any vendor they paid more than $600 per year.

a. I'm highly skeptical that the IRS has the ability to routinely reconcile every 1099-MISC they now receive against every taxpayer. Maybe, but more likely they are looking for patterns and potential evaders, or a place to get additional information on receipts when they already suspect underreporting. A single payment to an individual is highly unlikely to attract attention.

b. That being said, the paperwork is pretty simple. File a Schedule C. Report the revenue ($3000) and the costs incurred to generate that revenue. If you were paid $3000 for timber that you paid someone else more than $3000 to cut down, stop there. That expense was dispersed in a single year and exceeds the revenue generated. The IRS is not going to waste any of its resources looking to pick apart your meager expense for a chance at some meager tax dollars. Even if the entire amount was taxable (it's not - only the profit is) and you are in the highest tax bracket, you would owe about $1100 in federal tax.

And don't forget, part of the expense is what you paid for the trees (their value) when you bought the land. This is a non-trivial to account for but real part of your expenses, which is why if what you paid for the harvest exceeds $3000 you just don't bother with it.

As someone else pointed out, actual timber business accounting is way more complicated than agriculture. Timber business expenses are accrued over 30+ years between harvests and offset revenue recognized in a single year. You aren't in that business!

Al
 

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Taxes should be a lot simpler than what they are. But it is what it is. With all the loopholes a lot of well off companies and people pay no taxes.
 

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Discussion Starter #17
As a follow up...CPA advice was to report the income and report the basis as the same since the timber hadn't been appraised, so the two would wash. Didn't recommend I reported a loss. I'm ok with it, as I didn't end up owing anything extra.

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About 5 years ago, my neighbor wanted to sell trees in our shared fence row. I did not care either way and let him sell. We each got a check, 50/50 split. We also got 1099MISC (IIRC).

I probably could have claimed a wash, but just claimed it as income and paid the tax on it.
 
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