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Timber Taxations Issues

By: Bill Stanke, CPA

An investor or owner of timberland is faced with a number of tax planning opportunities that are unique to the owning of timberland. A few of the more common areas are as follows:

Reforestation costs. The current Internal Revenue Code allows taxpayers to expense the first $10,000 of qualified reforestation costs each year. Expenditures in excess of $10,000 per year are capitalized and amortized (written off) over 84 months. It is important to make the election (under Internal Revenue Code Section 194) properly. If the election is not made, the reforestation costs must be capitalized. If the costs are capitalized, the cost can only be recovered (in the form of depletion) when the timber is harvested.

Capital gains for timber sales. A timber owner who holds timber “primarily for sale to customers in the ordinary course of business” can qualify the timber sale under Section 631(b) of the Internal Revenue Code. This allows the seller of timber to receive capital gain treatment on the sale. It is important that contract of sale be drafted properly, but both “pay-as-cut” as well as lump sum contracts can qualify for IRC Section 631(b) treatment. Timber located in the State of Idaho that has been owned for more than twenty-four months will also qualify for special Idaho capital gains tax treatment.

Timber Depletion. A purchaser of timberland needs to determine (at the time of purchase) the value of standing timber purchased, as well as the value of the bare timber land. It is important for the timber cruise to determine the volume and species of timber on the property being acquired, as well as the associated harvest and transportation costs that the landowner would incur. When timber is later harvested, it would be possible to compute a depletion allowance, based on the volume and species of timber harvested. Copies of the scale reports are invaluable in determining the volume of timber harvested.

Summary. These are a just a few of the areas that demonstrate the unique tax opportunities (and pitfalls) associated with an investment in timberland. It is important that the timber owner have a forester, attorney and tax advisor who can work together to maximize the benefits available to timberland owners. It also underscores the necessity to maintain detailed and accurate records over the entire life of the investment, from acquisition to sale.

Bill Stanke is a partner in the accounting firm of Mann & Stanke, CPA (P.A.).  He and his partner, Greg Mann started the business in 1994, and currently have offices in Moscow and Kendrick, Idaho.  They primarily specialize in accounting and tax services for individuals, trusts and small businesses.  They can be reached at (208) 883-5555 or (800) 680-1999.

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