Page 100 - Small Business Taxes

16:31 - 2-Feb-2023
Page 41 of 57
Fileid: … tions/p535/2022/a/xml/cycle01/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
calculation. However, for oil, gas, or geothermal 3. Figure the number of timber units to take sale or exchange, or make an outright sale of
property, gross income does not include lease into account by adding the number of tim- timber.
bonuses, advanced royalties, or other amounts ber units acquired during the year to the
payable without regard to production from the number of timber units on hand in the ac-
property. count at the beginning of the year and
then adding (or subtracting) any correction
Ending the lease. If you receive a bonus to the estimate of the number of timber
on a lease that ends or is abandoned before units remaining in the account.
you derive any income from mineral extraction 10.
or the cutting of timber, include in income the 4. Divide the result of (2) by the result of (3).
depletion deduction you took on the bonus. Do This is your depletion unit.
this for the year the lease ends or is aban-
doned. Also, increase your adjusted basis in the Example. You bought a timber tract for Business Bad
property to restore the depletion deduction you $160,000 and the land was worth as much as
Based on an estimated 1 million feet board Debts
previously subtracted. the timber. Your basis for the timber is $80,000.
For advanced royalties, include in income
the depletion claimed on minerals or timber for measure (FBM) or 1,000 “thousand board feet”
which the advanced royalties were paid, if the (MFBM) of standing timber, you figure your de-
1,000). If you cut 500 MFBM of timber, your de- Introduction
minerals were not produced or timber not cut pletion unit to be $80 per MFBM ($80,000 ÷
before the lease ended. Include this amount in
income for the year the lease ends. Increase pletion allowance would be $40,000 (500 You have a bad debt if you cannot collect
your adjusted basis in the property by the MFBM × $80). money owed to you. A bad debt is either a busi-
amount you include in income.
When to claim depletion. Claim your deple- ness bad debt or a nonbusiness bad debt. This
Delay rentals. These are payments for defer- tion allowance as a deduction in the year of sale chapter discusses only business bad debts.
Generally, a business bad debt is one that
ring development of the property. Since delay or other disposition of the products cut from the comes from operating your trade or business.
rentals are ordinary rent, they are ordinary in- timber, unless you choose to treat the cutting of You can deduct business bad debts on Sched-
come to the payee that is not subject to deple- timber as a sale or exchange (explained below). ule C (Form 1040) or your applicable business
tion. These rentals can be avoided by either Include allowable depletion for timber products income tax return.
abandoning the lease, beginning development not sold during the tax year the timber is cut as All other bad debts are nonbusiness bad
operations, or obtaining production. a cost item in the closing inventory of timber
products for the year. The inventory is your ba- debts and are deductible only as short-term
sis for determining gain or loss in the tax year capital losses. For more information on nonbus-
Timber you sell the timber products. iness bad debts, see Pub. 550.
Example. The facts are the same as in the
You can figure timber depletion only by the cost previous example, except that you sold only Topics
This chapter discusses:
method. Percentage depletion does not apply half of the timber products in the cutting year.
to timber. Base your depletion on your cost or You would deduct $20,000 of the $40,000 de-
other basis in the timber. Your cost does not in- pletion that year. You would add the remaining • Definition of business bad debt
clude the cost of land or any amounts recovera- $20,000 depletion to your closing inventory of • When a debt becomes worthless
ble through depreciation. timber products. • How to claim a business bad debt
Depletion takes place when you cut stand- • Recovery of a bad debt
ing timber. You can figure your depletion de- Electing to treat the cutting of timber as a
duction when the quantity of cut timber is first sale or exchange. You can elect, under cer- Useful Items
accurately measured in the process of exploita- tain circumstances, to treat the cutting of timber You may want to see:
tion. held for more than 1 year as a sale or ex-
change. You must make the election on your in- Publication
Figuring cost depletion. To figure your cost come tax return for the tax year to which it ap- 525 525 Taxable and Nontaxable Income
depletion allowance, you multiply the number of plies. The election can’t be made on an
timber units cut by your depletion unit. amended return. If you make this election, sub- 536 536 Net Operating Losses (NOLs) for
Timber units. When you acquire timber tract the adjusted basis for depletion from the Individuals, Estates, and Trusts
fair market value (FMV) of the timber on the first
property, you must make an estimate of the day of the tax year in which you cut it to figure 544 544 Sales and Other Dispositions of
quantity of marketable timber reasonably the gain or loss on the cutting. You generally re- Assets
known, or on good evidence believed to exist port the gain as long-term capital gain. The
on the property. You measure the timber using FMV then becomes your basis for figuring your 550 550 Investment Income and Expenses
feet board measure (FBM), log scale, cords, or ordinary gain or loss on the sale or other dispo- 556 556 Examination of Returns, Appeal
other units. If you later determine that you have sition of the products cut from the timber. For Rights, and Claims for Refund
more or less units of timber, you must adjust the more information, see Timber in chapter 2 of
original estimate. Pub. 544. Form (and Instructions)
The term “timber property” means your eco-
nomic interest in standing timber in each tract or You may revoke an election to treat the cut- Schedule C (Form 1040) Schedule C (Form 1040) Profit or Loss
block representing a separate timber account. ting of timber as a sale or exchange, without the From Business
IRS's consent, by the due date (including exten-
Depletion unit. You figure your depletion sions) for the return. The prior election (and rev- 1040-X 1040-X Amended U.S. Individual Income
unit each year by taking the following steps. ocation) is disregarded for purposes of making Tax Return
1. Determine your cost or adjusted basis of a subsequent election. See Form T (Timber, 1045 1045 Application for Tentative Refund
Forest Activities Schedule) for more informa-
the timber on hand at the beginning of the tion. 1065 1065 U.S. Return of Partnership Income
year. Adjusted basis is defined under Cost
Depletion in the discussion on Mineral Form T (Timber, Forest Activities Sched- 1065-X 1065-X Amended Return or
Property, earlier. ule). Complete and attach Form T (Timber, Administrative Adjustment Request
2. Add to the amount determined in (1) the Forest Activities Schedule) to your income tax (AAR)
cost of any timber units acquired during return if you claim a deduction for timber deple- 1120-S 1120-S U.S. Income Tax Return for an S
the year and any additions to capital. tion, choose to treat the cutting of timber as a Corporation
Chapter 10 Business Bad Debts Page 41