Timber landowners like many other agricultural enterprises may encounter significant weather events like Hurricane Helene that destroy all or a portion of their planted trees. Naturally the question arises whether there are any tax breaks for these types of scenarios. First, it must be considered a casualty loss meaning it was an event that was sudden, unexpected, and unusual. Typically fires, floods, earthquakes, tornados, and hurricanes are considered casualty events. Insects, drought, and disease typically do not qualify because they do not meet all three criteria of being sudden, unexpected, and unusual. If the timber owner experiences such an event, it is important to document the event itself (newspaper clippings, articles, weather reports) and document the condition of the stand before and after the event. This does not need to be elaborate but is important for verification purposes. For casualty events, the deductible loss is the lesser of the adjusted basis (in the trees) – or – the reduction in the fair market value before and after the casualty event. Typically, the adjusted basis is going to be the limiting factor as the basis is usually lower than the decrease in fair market value. If the taxpayer qualifies for a casualty loss, they may take the loss in the current year or the prior year if the area has been federally declared as a disaster area. Claiming the loss in the prior year allows taxpayers to amend the previous year’s return and (potentially) receive any tax benefit more quickly. Hobby landowners may benefit from a “Qualified Disaster Loss” which allows an increase to their standard deduction amount. This information can be found in IRS Publication 547 (pg. 4). For landowners where timber is considered an investment, the loss is first calculated on Form 4684 and the loss is reportable on Schedule A of the 1040. This is beneficial only if the landowner ends up itemizing their deductions instead of taking the standard deduction. For timber business owners, the loss would be reportable on IRS Form 4684 and will then go to IRS Form 4797. Taxpayers in an area qualifying for disaster relief may also receive extra time from the IRS to file returns and pay taxes. Record keeping of the operation will be important for making these determinations.
For more information visit: https://www.timbertax.org/publications/fs/taxtips/salvage-timber.pdf
Author
Kevin Burkett, Cooperative Extension, Agribusiness Team Extension Associate
Clemson University Cooperative Extension Service offers its programs to people of all ages, regardless of race, color, gender, religion, national origin, disability, political beliefs, sexual orientation, gender identity, marital or family status and is an equal opportunity employer.
