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FEATURED PROFESSIONAL: Eric Femreite, Northwest Management, Inc.

Timber Tax Thoughts

As tax season approaches, there are some things you may want to consider as you and your tax professional get ready to prepare your returns.  If you harvested timber this year, this article will outline some tax consideration you should discuss with your tax professional prior to filing.

It is beneficial to landowners to first determine the value of their timberland, which is called the basis. Landowners need to know the value of the timber and the value of the underlying land on the date of purchase.  Part of the purchase price is allocated against the timber and the remaining is allocated to the land and other improvements identifying the basis.

The first step in determining the value of timberland is to obtain an accurate estimate of the timber volume by completing a timber cruise.  A timber cruise is a systematic, intensive, statistically reliable sampling of your forest that gives the best estimate of the species composition, size and quality of the timber found on your property today. To identify what the timber volume was on the date of purchase, a model is used to “reverse” the current estimated volume obtained from the cruise to the estimated volume on the date of purchase.  The next step is to determine the value of merchantable wood on your property.  This timber value is based on the market conditions within the general location of your property as of the date of purchase.  A good database of log prices over time is necessary for this valuation.

Income from a timber harvest usually creates a taxable event for most landowners.  However, not all income is necessarily taxable; a portion of the purchase price may be allocated against this income as part of your timber basis.  When the timber is sold, you may be able to take a depletion deduction against the timber volume sold, which allows you to adjust the basis. Working with your tax professional is necessary to accurately adjust the basis.  Keeping good records is a must and your tax advisor will need any timber cruises, timber valuations, and scale reports that support your depletion allowance.

If proceeds from a timber sale are reported as ordinary income, you can expect to pay much more in taxes than if the income is reported as capital gains.  To qualify for long term capital gains, you must have owned your property for more than one year.  If income from a timber sale is reported as ordinary income, the landowner may be subject to self-employment taxes as well. This is something you should discuss with your tax professional.

You may be eligible for a tax credit if you plant seedlings on your property.  Remember, in order for you to take advantage of this tax credit, you must include it when you file your taxes in the year that the expenses were incurred.

Finally if you are treating your timbered property as a business and you are actively participating in this business you may be able to deduct your expenses.  These expenses may include property taxes, interest, and other management expenses.  This deduction may apply to income from any source.   Please check with your tax advisor for help with determining if you qualify for any of these tax savings options.

Eric Femreite has a B.S. Degree in Forest Products from the University of Idaho, Moscow, ID and has completed multiple forest stewardship plans for Idaho landowners.  He has worked for Northwest Management, Inc. since 2004.

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