Forest Landowners’ 

Guide to the Federal 

Income Tax

Supersedes “Forest Landowners’ Guide to the Federal Income Tax,” Agriculture 

Handbook No. 718, issued March 2001.

United States 

Department of 

Agriculture

Forest Service

Agriculture 

Handbook 

No. 731

February 2013

John L. Greene, Research Forester, U.S. Department of Agriculture (USDA) Forest Service, 

Southern Research Station, Research Triangle Park, NC

William C. Siegel, Attorney and USDA Forest Service Volunteer, River Ridge, LA

William L. Hoover, Professor of Forestry, Purdue University, West Lafayette, IN

Mark Koontz, Purdue University, West Lafayette, IN

The Office of the Chief Counsel of the Internal Revenue Service reviewed this publication and 

made valuable suggestions for improvement.
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Washington, D.C. 20250-9410 or call (800) 795-3272 (voice) or (202) 720-6382 (TDD). USDA is an equal opportunity provider 

and employer.

The use of trade or firm names in this publication is for the reader information and does not imply endorsement by the U.S. 

Department of Agriculture of any product or service.
Forest Landowners’ Guide to the Federal Income Tax iii

Abstract

Greene, J.L.; Siegel, W.C.; Hoover, W.L.; Koontz, M. 2012. 

Forest landowners’ guide to the Federal income tax. Agriculture Handbook 731. Washington, DC: U.S. Department of 

Agriculture.

This guide updates and supersedes Agriculture Handbook No. 

718, Forest Landowners’ Guide to the Federal Income Tax, 

incorporating new tax legislation that was passed and administrative changes promulgated through September 30, 2012. It 

introduces tax planning and basic tax considerations and explains the Federal income tax as it pertains to timber and forest 

land, including basis and capital accounts, reforestation tax 

incentives, depreciation and the Internal Revenue Code section 

179 deduction, operating expenses and carrying charges, the 

passive loss rules, sale or disposal of timber, Government costsharing programs, other timber-related receipts, and information 

returns. In addition, this guide describes the tax implications

of other forest-related topics, including donation or sale of a 

conservation easement, installment sales, the alternative minimum tax, self-employment taxes, Christmas tree production, 

and nontimber forest products; discusses forms of forest land 

ownership, researching tax questions, sources of tax assistance, 

and forest recordkeeping; and provides a glossary of terms, 

summaries of selected Internal Revenue Service (IRS) rulings, 

and a copy of IRS Form T (Timber): Forest Activities Schedule, 

together with instructions and annotations.
iv Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax v

Abstract....................................................................................iii

List of Tables..........................................................................viii

List of Figures........................................................................viii

Chapter 1. Introduction .............................................................1

Purpose .................................................................................1

New Information ..................................................................1

Organization .........................................................................1

Internal Revenue Service Review ........................................1

Chapter 2. Tax Planning............................................................3

Your Planning Team .............................................................3

Developing Integrated Plans ................................................3

Financial and Forest Management Planning....................3

Financial Aspects of Forest Management Planning.........3

Forest Management and Estate Planning.........................4

Planning Implications......................................................4

Tax Considerations When Acquiring Forest Land ...............5

Tax Considerations When Selling Timber............................5

Chapter 3. General Tax Considerations ....................................7

Types of Forest Ownership and Operation...........................7

Purpose for Holding Timber.................................................7

Personal Use ....................................................................7

Investment........................................................................7

Business...........................................................................7

Types of Taxpayers...............................................................8

Structuring Your Timber Activities ......................................8

Chapter 4. Cost Considerations.................................................9

Capital Costs.........................................................................9

Original and Adjusted Basis ............................................9

Allocation of Original Basis..........................................10

Establishment of Accounts.............................................12

Reforestation Tax Incentives..............................................13

Deduction.......................................................................13

Amortization ..................................................................15

Qualifications for Deduction and Amortization.............15

Reporting Procedures.....................................................15

Depreciation and the IRC Section 179 Deduction .............16

Depreciation Deduction .................................................16

The IRC Section 179 Election .......................................22

Disposition of Depreciated Property..............................25

Currently Deductible Costs: Operating Expenses 

and Carrying Charges ....................................................25

Carrying Charges...........................................................26

The Passive Loss Rules......................................................26

Timber Held as Part of a Trade or Business in 

Which the Taxpayer Materially Participates.............27

Timber Held as Part of a Trade or Business With 

No Material Participation..........................................28

Timber Held as an Investment .......................................28

Chapter 5. Income Considerations..........................................31

Timber Sale Receipts..........................................................31

Determining the Amount of Gain or Loss .....................31

Determining the Type of Gain or Loss ..........................32

Sale of Standing Timber for a Lump Sum.....................37

IRC Section 631(b) Disposal of Standing Timber 

With an Economic Interest Retained or Lump Sum..38

IRC Section 631(a) Cutting of Standing Timber 

With an Election To Treat as a Sale...........................41

Government Program Payments.........................................43

Qualifying Payments......................................................44

Determining the Excludable Amount ............................47

Determining Income Realized .......................................48

Including Cost-Sharing Payments in Gross 

Income.......................................................................49

Recapture Provisions .....................................................49

IRS Form T (Timber)..........................................................49

Other Timber-Related Receipts..........................................49

Information Returns ...........................................................50

Chapter 6. Tax Implications of Voluntary Property 

Exchanges.............................................................51

Introduction ........................................................................51

Nonrecognition Mandatory for Qualified Transactions......51

Properties Eligible for Like-Kind Exchange Treatment.....51

Exchange of Real Property for Real Property ...............52

The Meaning of Investment and Trade or 

Business.....................................................................52

Change in Use................................................................52

Time Considerations......................................................52

Multiparty Exchanges....................................................52

Assumption of Liabilities...................................................52

Exchanges Between Related Parties...................................53

Basis After a Nontaxable Exchange ...................................53

Application to Timber Properties.......................................53

Reporting of Like-Kind Exchanges....................................53

Contents
vi Forest Landowners’ Guide to the Federal Income Tax

Chapter 7. Deductible Losses: Casualties, Thefts, 

Condemnations, and Noncasualty Losses.............55

Losses to Timber or Forest Land........................................55

Form of Ownership........................................................55

Deductible and Nondeductible Losses...........................55

Deductible Portion of a Loss .........................................55

Type of Deduction and How To Report It......................55

Casualty..............................................................................56

Definition .......................................................................56

Calculating Your Loss From a Casualty ........................56

Deducting a Loss From a Casualty................................58

Theft Loss...........................................................................59

Definition .......................................................................59

Differences From a Casualty .........................................59

Calculating Your Loss From a Theft..............................59

Deducting a Theft Loss..................................................59

Condemnation ....................................................................60

Definition .......................................................................60

Differences From a Casualty .........................................60

Calculating Your Loss From a Condemnation...............60

Amounts Not Included in a Condemnation Award ........60

Deducting a Condemnation Loss...................................61

Noncasualty Loss ...............................................................61

Definition .......................................................................61

Differences From a Casualty .........................................62

Calculating a Noncasualty Loss.....................................62

Deducting a Noncasualty Loss ......................................62

Treatment of Expenses.......................................................62

Casualty or Theft Loss...................................................62

Condemnation................................................................62

Noncasualty Loss...........................................................62

Treatment of Gain...............................................................63

Postponing Recognition of a Gain.................................63

Reporting a Gain............................................................64

Chapter 8. Tax Implications of Forest Stewardship................67

Treatment of Management Expenses Keyed to 

Production of Income.....................................................67

Capital Costs Recovered When Property Is Sold 

or Subject to Casualty Loss.......................................67

Capital Gains Treatment Applies...................................67

Estate Planning ..............................................................67

Conservation Easements.....................................................68

Qualifications for Charitable Deduction of 

Conservation Easements ...........................................68

Valuation of Donation....................................................68

Estate Tax Exclusion for Land Subject to a 

Qualified Conservation Easement .............................69

Chapter 9. Other Tax Considerations......................................71

Installment Sales.................................................................71

Introduction....................................................................71

Sale Price .......................................................................71

Basis...............................................................................72

Gross Gain .....................................................................72

Sales to Related Parties..................................................72

Reporting Installment Sales...........................................72

Electing Out ...................................................................72

Alternative Minimum Tax ..................................................73

Potential Liability for the AMT .....................................73

Alternative Minimum Taxable Income..........................73

Social Security Self-Employment Tax ...............................74

Treatment of Spouses.....................................................74

Excluded Income ...........................................................75

Other Considerations .....................................................75

How To Calculate Self-Employment Tax ......................75

Including Timber Gains in Self-Employment Income 

To Guarantee Benefits...............................................75

Employment Status.............................................................76

Employee Status Determination ....................................76

The 20 Factor Test .........................................................76

Obtaining an IRS Ruling................................................77

Information Return Requirements.................................77

Chapter 10. Christmas Tree Production..................................79

General Considerations ......................................................79

Treatment of Costs .............................................................79

Establishment Costs.......................................................79

Operating Expenses and Carrying Charges...................79

Uniform Capitalization Rules........................................79

Treatment of Income ..........................................................80

Christmas Tree Sales Income.........................................80

Choose and Cut Operations ...........................................81

Chapter 11. Taxation of Nontimber Forest Products...............83

Products Taxed as Ordinary Income...................................83

Byproducts From Timber Harvests................................83

Fee Activities and Leases...............................................83

Products From Trees......................................................83

Living Trees...................................................................83

Products From Wild Forest Plants.................................83

Products From Cultivated Forest Plants ........................83

Products Taxed as a Capital Gain.......................................83

Qualifying Income From Tree Stumps and 

Long-Term Contracts ................................................83

Qualifying Income From Cultivated Forest 

Perennials..................................................................84

Reporting Expenses and Income From Nontimber 

Forest Products ..............................................................84
Forest Landowners’ Guide to the Federal Income Tax vii

Chapter 12. Form of Forest Land Ownership and 

Business Organization.........................................85

Basic Ownership Considerations........................................85

Sole Ownership..............................................................85

Co-Ownership................................................................85

Life Estates ....................................................................85

Community Property......................................................85

Business Management Organization ..................................86

Partnerships....................................................................86

Limited Partnerships......................................................86

Corporations...................................................................86

Subchapter S Corporations ............................................87

Limited Liability Companies.........................................87

Other Tax Entities..........................................................87

Chapter 13. Researching a Tax Question and Appeals 

Procedures...........................................................89

Statutory Law .....................................................................89

Administrative Law............................................................89

Revenue Rulings............................................................89

Revenue Procedures.......................................................90

General Counsel Memoranda ........................................90

News Releases, Notices, and Announcements...............90

Private Letter Rulings....................................................90

Technical Advice Memoranda .......................................90

Case Law............................................................................90

Federal Court System.....................................................91

Interpreting Case Law....................................................91

Audits and Appeals.............................................................92

How Returns Are Selected for Examination..................92

The Examination Process...............................................92

Appeals Within the IRS .................................................93

Appeals to the Courts.....................................................93

Claims for Refund..........................................................94

Additional Information.......................................................94

Integrated Example of Tax Research..................................94

Chapter 14. Sources of Tax Assistance ...................................97

IRS Publications.................................................................97

Commercial Tax Services...................................................98

The Internet ........................................................................98

Tax Preparation Software and Electronic Filing ................98

Tracking Current Developments ........................................98

Chapter 15. Forest Records...................................................101

Management Information.................................................101

Accounting Methods ........................................................101

Cash Accounting..........................................................101

Accrual Accounting .....................................................101

Recordkeeping Systems ...................................................102

Shoebox .......................................................................102

A Forest Landowner’s Journal.....................................102

A Forest Landowner’s Journal With Accounts ............104

Ledger Accounts...............................................................104

Capital Accounts..........................................................104

Expense Accounts........................................................106

Capital Income Accounts.............................................106

Ordinary Income Accounts..........................................106

General Business Accounts..........................................106

A Comprehensive Example of Forest Land 

Purchases and Management.........................................107

Records for Forest Land Purchases .............................107

Records for Forest Land Management.........................109

Glossary ................................................................................ 111

Appendix A. Summaries of Selected Revenue Rulings........125

Basis and Depletion Allowance........................................125

Capital Gains....................................................................126

Cost-Sharing Payments ....................................................128

Like-Kind Exchanges.......................................................129

Involuntary Conversions ..................................................129

Appendix B. IRS Form T (Timber): Forest Activities 

Schedule...........................................................131

Appendix C. Instructions for IRS Form T (Timber).............135

Appendix D. Annotations for IRS Form T (Timber) ............139

Entries on IRS Form T .....................................................139

Identification ................................................................139

Part I. Acquisitions.......................................................139

Part II. Timber Depletion.............................................141

Part III. Profit or Loss From Land and Timber 

Sales (see instructions)............................................144

Part IV. Reforestation and Timber Stand 

Activities (see instructions).....................................145

Part V. Land Ownership...............................................146

Index .....................................................................................147
viii Forest Landowners’ Guide to the Federal Income Tax

List of Tables List of Figures

Figure 4.1—IRS Form T (Timber), Part I: Acquisitions........ 11

Figure 4.2—IRS Form T (Timber), Part II: Timber 

Depletion.................................................................................14

Figure 5.1—IRS Form T (Timber), Part II: Timber 

Depletion.................................................................................33

Figure 5.2—IRS Form T (Timber), Part III: Profit or 

Loss From Land and Timber Sales.........................................34

Figure 5.3—IRS Form T (Timber), Part II: Timber 

Depletion.................................................................................35

Figure 5.4—IRS Form 8949: Sales and Other 

Dispositions of Capital Assets.................................................39

Figure 5.5—IRS Form 1040, Schedule D: Capital Gains 

and Losses...............................................................................40

Figure 5.6—IRS Form 4797: Sales of Business Property......45

Figure 5.7—IRS Form 1040, Schedule C: Profit or Loss 

From Business.........................................................................46

Figure 7.1—IRS Form T (Timber), Part II: Timber 

Depletion.................................................................................65

Figure 7.2—IRS Form T (Timber), Part II: Timber 

Depletion.................................................................................66

Figure 15.1—Evergreen Tree Farm: Journal........................102

Figure 15.2—Evergreen Tree Farm: Land Account.............105

Figure 15.3—Evergreen Tree Farm: Merchantable 

Sawtimber Subaccount: Volume Basis..................................105

Figure 15.4—Evergreen Tree Farm: Young-Growth 

Subaccount............................................................................105

Figure 15.5—Evergreen Tree Farm: Depreciable Land 

Improvement Account...........................................................106

Figure 15.6—Evergreen Tree Farm: Merchantable 

Sawtimber Subaccount: Cost Basis.......................................108

Table 4.1—Recovery periods under the Modified 

Accelerated Cost Recovery System GDS and ADS for 

types of property commonly associated with forest 

operations................................................................................17

Table 4.2—Prescribed and accepted alternative 

depreciation methods for property, by GDS recovery

period ......................................................................................18

Table 4.3—200 percent declining balance depreciation 

rates for nonfarm property with 3-, 5-, 7-, 10-, 15-, and 

20-year GDS recovery periods using the half-year 

convention...............................................................................19

Table 4.4—200 percent declining balance depreciation 

rates for nonfarm property with 3-, 5-, 7-, 10-, 15-, and 

20-year GDS recovery periods using the mid-quarter 

convention for property placed in service in the fourth 

quarter .....................................................................................20

Table 4.5—Straight line depreciation rates for 

nonresidential real property with a 39-year recovery 

period using the mid-month convention .................................20

Table 4.6—IRC section 179 maximum deduction, 

phaseout limit, and controlling legislation, by year, 

2001 through 2012 ..................................................................22

Table 5.1—How noncorporate taxpayers are taxed in 2012..36

Table 5.2—How corporate taxpayers are taxed in 2012........36

Table 5.3—Federal and State conservation cost-sharing 

programs commonly used by forest landowners that meet 

the requirements for exclusion from gross income.................44

Table 15.1—Evergreen Tree Farm accounts........................107

Table 15.2—Summary of cruise (appraisal) reports for 

Evergreen Tree Farm and Lonesome Pine forest land 

purchases...............................................................................108

Table 15.3—Allocation of Evergreen Tree Farm assets 

to capital accounts.................................................................108
Forest Landowners’ Guide to the Federal Income Tax 1

Purpose

This publication is the latest in a series of income tax handbooks for family forest owners that began with the 1953 publication of Agricultural Handbook No. 52, The Small Timber 

Owner and His Income Tax. It represents a major revision of 

Agriculture Handbook No. 718, Forest Landowners’ Guide to 

the Federal Income Tax. It updates that publication to include 

tax legislation that was passed and administrative changes that 

were promulgated through late 2012.

The primary purpose of this guide is to foster good management of family-owned forest land by providing an explanation 

of the provisions and incentives related to forest ownership and 

management under Federal income tax law. It does not provide 

guidance on managing timber or other forest products. That 

type of information is available from State agency foresters, 

Cooperative Extension foresters, forestry consultants, and industry foresters.

It is important to note that the guide’s authors are foresters and 

use terms in a conventional forestry sense, not an accounting 

sense. One example is timber stand improvement (TSI), a term 

for practices to improve the composition or condition of an 

established timber stand. Although its name includes the word

improvement, TSI typically is not an improvement in the accounting sense, the cost of which must be capitalized; rather, it 

is an ordinary and necessary forest management practice, the 

cost of which may be deducted in the year it is incurred.

New Information

In addition to revising and updating previous tax guides, this 

guide contains substantial new information. Chapter 5 includes 

a description of the reporting requirements for outright timber 

sales under Treasury Decision 9450, published in May 2009. 

Chapter 11 is a new chapter on the tax treatment of nontimber 

forest products. Chapter 14 is expanded to discuss tax preparation software and electronic filing for forest owners, and the 

appendixes are expanded to include instructions and line-byline annotations for Internal Revenue Service (IRS) Form T 

(Timber): Forest Activities Schedule.

Chapter 1. Introduction

Organization

This guide is organized into six sections. The first section, 

chapters 1 through 3, introduces tax planning and general tax 

considerations. The second section, chapters 4 through 7, explains the Federal income tax as it pertains to timber and timber 

transactions. Chapters 8 through 11 comprise the third section, 

which addresses the tax implications of other forest-related topics, including the donation or sale of a conservation easement,

installment sales, the alternative minimum tax, self-employment 

taxes, Christmas tree production, and nontimber forest products. The fourth section, chapters 12 through 14, provides basic

information on forms of forest land ownership, how to research 

a tax question, and where to look for tax assistance. The fifth 

section, chapter 15, presents a system for forest recordkeeping 

and provides an integrated example of its use. The last section, 

the appendixes, includes summaries of selected IRS rulings, a 

glossary of terms, a copy of IRS Form T (Timber) together with 

instructions and annotations, and an index.

Internal Revenue Service Review

This guide has been reviewed by the IRS Office of the Chief 

Counsel, the Forester Agents, the Forest Products Industry 

Counsel, and the Forest Products Technical Advisor. It is not, 

however, an official publication of the IRS and should not be 

construed as an official interpretation of the Internal Revenue

Code (IRC) or income tax regulations. The IRS does not endorse the overall content or any reference herein pertaining to 

individual tax advisors or tax Web sites that are not a part of the 

IRS (http://www.irs.gov). This guide is a U.S. Department of 

Agriculture (USDA) publication and is intended only to serve 

as a resource for you and your tax advisor.

The information in this guide is based on current law and regulations as of September 30, 2012. Nevertheless, many provisions of recent tax legislation are still under review by the IRS, 

and new regulations continue to be published. You should consult the most current information appropriate to your individual 

situation, as outlined in chapter 13.
2 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 3

Chapter 2. Tax Planning

Your Planning Team

You may have many objectives for your forest property, including as a place to enjoy outdoor activities, to protect nature and 

biological diversity, to grow forest products for sale or use, to 

provide a legacy for your heirs, or as a financial reserve against 

future needs. Meeting your objectives to their fullest potential 

requires the development and implementation of integrated 

financial, forest management, and estate plans. To accomplish 

this task, you likely will need the expertise of a team of professionals that includes an attorney, an accountant, and a consulting 

forester. The role of each of these individuals is discussed in the 

following sections, in the context of the part they can play in the 

development and implementation of your integrated plans.

As the forest owner, however, it is up to you to lead your team 

by setting the overall objectives and ensuring they are met in 

a cost-effective manner. Owners who relinquish this role to 

other members of their planning team run the risk of ending 

up with plans that are costly to implement, yet do not fully 

meet their objectives.

Developing Integrated Plans

Financial and Forest Management 

Planning

If your objectives for your forest property include growing 

timber for sale, the financial goal for your timber management 

activity should be to maximize the after-tax return on the funds 

you invest. If your objectives all center on enjoyment of the 

forest, it most likely is personal use property in your hands and 

should be treated accordingly for tax purposes.

Profitability and enjoyment are not incompatible objectives, but 

expenditures that do not directly and materially contribute to 

profitability may not receive favorable tax treatment. For this 

reason, if you wish to take maximum advantage of the available 

tax benefits, you should work with your forester to develop a 

forest management plan that clearly indicates you have a profit 

motive for your forest operation. You also should work with 

your accountant to develop a recordkeeping system that distinguishes between expenditures that are profit-oriented and those 

that are for enjoyment.

The goal for your tax planning should be avoidance of taxes 

over the long term. Tax avoidance is not tax evasion; rather, 

it is managing your taxes so that you pay only the amount required by law. In helping you develop your forest management 

plan, your forester can identify opportunities to make use of 

forest management and conservation incentives included in the 

law (see chapter 5, “Government Program Payments”). If your 

attorney and accountant are familiar with your forest management plan, they can identify opportunities to use tax-minimizing 

strategies, which may include tax deferral, shifting taxes among 

family members, or adjusting the timing of income and expenses to minimize their tax effect.

Consistency is important in your tax planning. You should 

evaluate your objectives and the extent of your forest management activity and decide whether your operation constitutes an 

investment, or alternatively, rises to the level of a trade or business (chapters 3, 4, 5, and 12). Your attorney and accountant 

can assist you in making the determination that best suits your 

situation. Your accountant then will be able to appropriately 

handle your records for the reporting of income and deduction 

of expenses

Financial Aspects of Forest Management 

Planning

Forest management investments usually are not considered tax 

shelters, because among other things, you cannot deduct more 

than your out-of-pocket expenses. In fact, some expenditures 

must be carried in your accounts for many years before you 

can recover them. As well, long-term borrowing on forest land 

is limited to institutions such as the Farm Credit System Bank 

(formerly the Federal Land Bank) and a few companies that 

specialize in timberland loans. Some commercial banks make 

short-term loans on forest property.

For a given level of risk, however, forest management may increase the returns to your overall investment portfolio. Because, in 

general, no tax is due until a gain is recognized, timber provides

a means of tax deferral because its appreciation in value over 

time is not recognized until it is harvested. Timber appreciates in 

value in several ways—growth in volume, in-growth into more 

valuable product categories (for instance, from pulpwood into 

sawtimber), increase in quality, and real (over and above inflation) increases in price over the long run.
4 Forest Landowners’ Guide to the Federal Income Tax

1

 For more detailed information on estate planning and estate planning strategies, see W.C. Siegel, H.L. Haney, Jr., and J.L. Greene. 2009. Estate Planning for Forest 

Landowners: What Will Become of Your Timber? General Technical Report SRS–112, USDA Forest Service, Southern Research Station, Asheville, NC. 180 p.

In addition to appreciating in value over time, an adequately 

stocked forest requires relatively little attention other than 

periodic monitoring and protection from fire, insects, disease, 

and timber theft (chapter 7). Your forester should routinely be 

involved in this process.

Timber also can serve as an inflation hedge, because it provides considerable flexibility in the timing of harvests. Most 

timber stands can be harvested 3 to 5 years before or after the 

economically optimal rotation age with a minimum amount of 

potential income foregone. Thus, timber-related income can be 

timed to avoid weak markets, to meet cash needs, or to minimize the effect of taxes. You should consider your tax brackets 

and rates for the years to which and from which you shift 

timber-related income.

For highly appreciated timber—that is, timber with a low basis 

compared with its value—you may be able to defer recognition 

of harvest income until after you retire. Furthermore, although 

timber is somewhat illiquid, it can provide a financial reserve 

to meet emergency cash needs. In particular instances, however, it may be preferable for forest management or tax planning reasons to meet short-term cash needs by borrowing with 

the forest land as collateral rather than by a timber sale. Your 

forester can provide input on the optimal timing of timber harvests for given assumptions about costs and returns, and your 

accountant can advise you as to the tax effects.

Forest Management and Estate Planning

Timber or forest land can be used as part of a strategy to transfer accumulated wealth to your heirs. Forest land can be a good 

candidate for a short-term trust or intergenerational joint ownership; it also can be the focus of a gifting program to reduce 

the gross value of your estate to less than the threshold for the 

Federal estate tax.

Additional opportunities exist for the gifting of timber or forest 

land, for example, to equalize ownership of a forest estate between spouses. Gifts, however, have two critical disadvantages. 

The first is loss of control over the gifted asset. The second is 

that the basis of gifted property—which in the case of timber 

often is quite low—is not stepped-up to its fair market value 

(FMV), as with property passed at death.

In many cases, the tax liability of a family can be minimized by 

using gifts of income-producing property to shift income from 

family members in high tax brackets to those in lower brackets. 

The Uniform Gifts to Minors Acts, however, limit the usefulness of such transfers to minors by restricting the types of assets 

that can be gifted and providing that income from gifted assets 

is taxed at the parent’s rate. Your attorney and accountant can 

advise you on the tax implications of various gifting strategies 

as well as their effect on your estate plan.

Your estate also may qualify for special use valuation of forest 

land and timber, provided under section 2032A of the Internal 

Revenue Code (IRC), and for deferral and extension of estate 

tax payments (IRC section 6166). In addition, under current 

(2012) law, estates of forest owners who die after December 

31, 2012, may be eligible for a deduction for a qualified familyowned business interest (IRC section 2057). Your forester can 

assist in the valuation of forest land assets for special use valuation, and your attorney or accountant can assist in making the 

appropriate elections.

As a renewable resource, timber often can provide funds to 

meet estate tax liabilities, which otherwise would require the 

sale of nonrenewable family assets. Your attorney and accountant can advise you on how to design your will and arrange your 

affairs to minimize estate and other transfer taxes.1

Planning Implications

Some characteristics of timber and forest land lend themselves 

to specific planning strategies. Deferral of income is an example—timber generally increases in volume and value year by 

year, but the increase is not recognized for income tax purposes 

until the trees are harvested. Other characteristics of timber and 

forest land require extra effort in planning.

Substantial Initial Investment. Acquisition of forest land 

generally requires a substantial initial investment with little 

possibility of immediate recovery, unless the land carries 

merchantable timber. For example, newly purchased forest land 

may have a bare land value of $500 or more per acre. If the 

land is not adequately stocked with timber, reforestation costs 

may run from $200 to $500 per acre, depending on the site. To 

minimize the time these costs must be carried in your accounts, 

you should ensure the appropriate portion of your total cost of 

acquisition is allocated to each asset account, and deduct or 

amortize qualified reforestation expenses (chapter 4).

Long Preproductive Period. Consider structuring your 

timber management activity to allow the deduction of qualified 

expenses against nontimber income when it is possible. Doing 
Forest Landowners’ Guide to the Federal Income Tax 5

this usually involves organizing your forest property as a trade 

or business and meeting the requirements for material participation (chapters 3 and 4). Early payment of future expenses at 

the end of each tax year increases the benefit of this deduction. 

Otherwise, try to acquire forest land with a good distribution of 

timber age classes.

Risk. Forest investments are subject to the same market risks 

as more conventional types of investment, including the effect 

of economic cycles and shifts in consumer tastes or product 

markets. But they also face other risks—damage or destruction 

by fire, severe weather, disease or insect infestation, timber 

theft, and condemnation for public use (chapter 7)—that are 

more or less unique. The long time horizon for forest investments exacerbates both the effect and the potential financial 

effect of risk.

Tax Considerations When Acquiring Forest Land

You will find it very helpful to develop and maintain in your 

files a written forest management plan that documents your 

intent to manage your forest land for profit and includes an 

estimate of the projected profit. Your forester should be able 

to make this projection as a routine matter. Establish asset accounts to which the total cost of acquisition—or the FMV of inherited property—is allocated in proportion to the FMV of each 

component of the property. It is best to establish the accounts 

right away, while the information is readily at hand (chapters 4 

and 15). If your State has preferential property tax laws for forest land, you also should file for property tax relief.

Tax Considerations When Selling 

Timber

Maximize your after-tax income from a timber sale by taking all 

allowable deductions against the sale proceeds. Your net timber 

sale proceeds can qualify as a capital gain, which is not subject 

to self-employment taxes. Furthermore, if you are retired, capital gains do not count toward the amount of income you can 

receive before your Social Security benefits are reduced (chapter 

9). If you owned the harvested timber for more than 1 year, the 

sale proceeds can qualify as a long-term capital gain, which is 

taxed at a lower rate than short-term capital gains or ordinary 

income (chapter 5). Consider structuring the timber sale to defer 

receipt of part of the sale proceeds to a later year (chapter 5), but 

only if the resulting tax savings exceeds the opportunity cost of 

not having use of the deferred funds. Perhaps most importantly, 

make sure your attorney and accountant are aware that such tax 

avoidance strategies are available for sales of timber.

Finally, remember that your integrated plans are dynamic documents that need to be updated for changes in your objectives, 

your family situation, the economy, markets for forest products, 

and the tax law. You will need to reconvene your planning team 

from time to time to ensure that your plans continue to help you 

fully realize your objectives for your forest property.
6 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 7

Chapter 3. General Tax Considerations

Types of Forest Ownership and 

Operation

How you treat income and expenses associated with your forest 

property for tax purposes depends on your purpose for owning 

the property, your actual use of it, your taxpayer classification 

with respect to the property, and the nature of the income or expense itself. For example, individuals who hold forest land as 

an investment or for personal use can fully deduct property tax 

as an itemized deduction. In contrast, individuals who hold forest land for use in a trade or business can deduct property tax 

as a business expense, and forest landowners who do not meet 

the requirements for material participation face restrictions on 

the amount they can deduct (chapter 4). Continuing the example, only individuals who hold forest land for the production 

of income can deduct management expenses, such as the cost 

of protecting their forest from fire—but owners who hold their 

forest land for personal use cannot. Furthermore, both investors and business owners who do not meet the requirements for 

material participation face restrictions on how much of such 

expenses they can deduct (chapter 4).

Income from a hunting lease or other fees you receive for the 

use of your forest land are considered ordinary income under 

all types of ownership (chapters 5 and 11). Income from the 

sale or disposal of timber, however, can qualify as a capital 

gain. Capital gain status depends on your purpose for holding 

the timber, how long you have held it, and how you dispose of 

it. See chapter 5 for a discussion of how to meet the requirements for capital gain treatment.

Purpose for Holding Timber

Forest property can be held for any of the three basic purposes 

discussed here, or some combination of them.

Personal Use

Property you do not own for the production of income is classified as personal use property. The house and lot you use for 

your personal residence is an example. Although you might 

expect to sell it someday for more than you paid, the primary 

reason you own it is as a place to live. Similarly, you might 

own forest property primarily as a residence, for personal enjoyment—such as a place to hunt, fish, or pursue other outdoor 

activities—or as a site for a vacation home.

Investment

If you manage your forest property for the eventual realization 

of a profit, but it is not your principal—or even a major—source 

of income, you may be holding it as an investment. Absentee 

owners often qualify as investors because their management 

activity does not rise to the level of a trade or business but is 

motivated primarily by a desire for profit rather than for recreation or other purposes.

Business 

If you entered into and carry on the management of your forest 

property primarily for profit and your activity is more regular 

and frequent than it might be for an investment, you likely hold 

it for use in a business. Conversely, you may be holding the 

timber on your forest land “primarily for sale to customers in 

the ordinary course of a trade or business.” See chapter 5, “Determining the Type of Gain or Loss.” Two characteristics of a 

business are (1) regularity of activities and transactions and 

(2) the production of income (see Internal Revenue Service 

[IRS] Publication 334, Tax Guide for Small Business).

Your relationship with a business in which you own an interest 

may be either active or passive in nature.

Active Business Interest. You have an active interest in a 

business if you materially participate in it, that is, you personally participate in the conduct of the business on a regular, 

continuous, and substantial basis.

Passive Interest. Your interest in a business is passive if you 

do not materially participate in its operations.

These distinctions in your purpose for holding timber, and their 

tax implications, are discussed in chapter 4, “The Passive Loss 

Rules.”

The determination of your primary purpose for holding a forest 

property is based on the facts and circumstances related to your 

intended and actual use of the property. No single factor is controlling, but your activities at the time of the determination are 

very important.

Because of the unique nature of forest property, there are usually elements of personal use associated with property held as 

an investment or even as part of a trade or business. In your 

recordkeeping and tax reporting, you should be careful to 

distinguish between activities associated with profit and those 
8 Forest Landowners’ Guide to the Federal Income Tax

associated with personal enjoyment. Each expense you deduct 

should have a clear investment or business purpose, be ordinary 

and necessary, reasonable in amount, and directly related to the 

production of income. Your records should be adequate to support the amount and purpose of each deduction (chapter 4).

Types of Taxpayers

There are two basic types of taxpayers: individuals and corporations. Individual taxpayers report income and expenses and 

compute their tax due on IRS Form 1040: U.S. Individual Tax 

Return. For tax purposes, there also are two types of corporations, C corporations and Subchapter S corporations. A 

C corporation reports income and expenses and computes its tax 

due on IRS Form 1120: U.S. Corporation Income Tax Return. 

Income the corporation then distributes to its shareholders in 

the form of dividends is reported on each shareholder’s Form 

1040, where it may be taxed a second time. In most instances, a 

corporation that meets the requirements for Subchapter S status 

avoids the corporate income tax. Income and expenses are passed 

through to the shareholders and taxed at the individual level, essentially as with a partnership.

Partnerships also file a tax return—IRS Form 1065: U.S. Return of Partnership Income—but it is an information return 

only. A partnership is a pass-through entity for tax purposes; 

it reports the income, expenses, and other tax items associated with its activity during the year and how these items have 

been distributed among its partners. Any tax due is paid at the 

individual level. Note that joint ownership of property does not 

necessarily create a partnership for tax purposes. A forest land 

ownership is taxed as a partnership if its operations are treated 

as a partnership under the law of the State where the property 

is located.

Two other forms of business organization have become popular as means for families to hold and manage forest land: the 

family limited partnership (FLP) and limited liability company 

(LLC). An FLP is a type of limited partnership, whereas an 

LLC is a hybrid organization combining advantages of a corporation and a partnership. Both are pass-through entities for tax 

purposes. An FLP files as a partnership, using IRS Form 1065. 

An LLC with more than one member also usually files as a 

partnership, whereas an LLC with a single member usually files 

as a sole proprietorship, using IRS Form 1040.

Estates and trusts present a special case. They may or may not 

pay income tax as a separate entity, depending on their particular 

situation. If an estate or trust earns or receives income, the executor (for an estate) or trustee (for a trust) must file a fiduciary 

return—IRS Form 1041: U.S. Income Tax Return for Estates and 

Trusts. The tax rate structure for income retained by an estate or 

trust has low thresholds for the higher tax brackets, which encourages passing income through to the beneficiaries rather than 

retaining it.

Forms of forest land ownership and business organization are 

discussed in chapter 12.

Structuring Your Timber Activities

It is important for you to consider your ownership and financial 

goals, the extent of your forest resources, and perhaps other 

factors before you decide which form of ownership is best for 

you, as discussed in chapter 12 and illustrated in chapter 15. 

Once you have made this decision, it should guide you in a 

consistent approach to managing your forest property, keeping 

records, and reporting taxes until your circumstances change.

Tax-wise, both the investment and business categories have 

advantages and disadvantages. Although tax considerations are 

important, they usually should not be the primary factor that 

determines which form of ownership to use. You should make 

that decision only after careful consideration and consultation 

with your legal, accounting, and forestry advisors.
Forest Landowners’ Guide to the Federal Income Tax 9

Chapter 4. Cost Considerations

In general, forest-related expenditures may be classified for 

Federal income tax purposes as one of three types: (1) capital 

costs, which comprise basis—these costs include expenditures 

that are recoverable through depreciation and amortization, as 

well as those that are recoverable through depletion when the 

asset is sold or otherwise disposed of; (2) currently deductible 

forest management and protection costs, taxes, and interest; 

and (3) costs of sale. The first two types of costs are discussed 

in this chapter; costs of sale are discussed in chapter 5. The 

uniform capitalization rules, which are addressed in chapter 10 

as they relate to Christmas trees, do not apply to timber production activities.

Capital Costs

Money spent to acquire real property or equipment, or to make 

improvements that increase the value of real property already 

owned, is classified as a capital cost. Examples of capital expenditures are those incurred for the purchase of land, timber, 

and buildings and for machinery and equipment having a 

useful life of more than 1 year. Other examples include funds 

expended for the construction of bridges, roads, culverts, and 

firebreaks; in certain cases for site preparation, tree planting, 

and seeding; and for major repairs or improvements that prolong the life of machinery and equipment. In general, all costs 

associated with the purchase or establishment of timber are 

capital expenditures. In most cases, the property owner who incurs capital costs is entitled to offset or deduct the expenditures 

against income arising from the property—and in some cases 

against income from other sources.

Capital costs usually cannot be deducted from income in their 

entirety in the year the money is expended, although there are 

some exceptions to this rule, as discussed in “Reforestation 

Tax Incentives” later in this chapter. Instead, capital costs must 

be used to establish or add to a capital account. The process of 

recording capital costs in an account so that they may be recovered over a period of years, or upon sale or other disposition 

of the property, is called capitalization. At any given time, the 

dollar value recorded in each account represents the amount of 

unrecovered capital costs currently invested in property for that 

account. The basic rules governing which timber-related costs 

must be capitalized are discussed in this chapter, as are the different methods of capital recovery.

Original and Adjusted Basis

When a capital asset is acquired, the value amount to be entered 

into the account at that time, for that particular item, depends 

on how the property was obtained, as discussed in the following paragraphs. This amount is called the original basis. The 

original basis may change as capital improvements are made to 

the asset, or as allowances for depletion, amortization, or depreciation are deducted. Costs incurred for capital improvements 

will increase the basis; allowances for depletion, amortization, 

and depreciation will decrease the basis. The methodologies for 

making these changes are illustrated in chapter 15. The dollar 

balance remaining in an account at any time after a change is 

made to the original basis is called the adjusted basis.

Purchased Assets. The original basis of a purchased capital 

asset is its total cost of acquisition; if funds are expended for its 

establishment, as with reforestation or afforestation, the original 

basis is the total establishment cost. Original basis is the first 

entry to be placed in the capital account for that particular item.

Inherited Assets. The original basis of inherited property is its 

fair market value (FMV)—or special use value if so elected—

on the date of the decedent’s death or on the alternate valuation 

date, as reported on the Federal estate tax return, if one is required. Special use valuation may be elected in certain instances 

for forest properties. The value is based on the property’s use 

for timber production rather than on a higher value for another 

purpose. The Federal estate tax alternate valuation date, if elected, is the earlier of 6 months after the date of the decedent’s 

death or the date an estate asset is sold. A Federal estate tax return is not required for many estates. In that case, the appraised 

FMV—or special use value if elected under State law—that is 

used for State death tax purposes will be the original basis. If 

neither a Federal nor a State return is required, the property’s 

original basis is its FMV on the date of death as determined by 

appropriate appraisal methods.

Assets Received by Gift. In most cases, the original basis of 

an asset received by gift is based on the donor’s adjusted basis 

on the date of the gift. This is the rule when the FMV of the gift 

on the donation date is more than the donor’s adjusted basis—

which is the usual situation. For gifts of this type made after 

1976, the recipient’s original basis is the donor’s adjusted basis, 

plus that portion of the sum of Federal and State gift taxes, if 

any, that applies to the difference between the donor’s adjusted 
10 Forest Landowners’ Guide to the Federal Income Tax

basis and the FMV of the gift on the date it was made. For such 

gifts made before 1977, the entire amount of Federal and State 

gift taxes paid, if any, up to the FMV of the gift when made, is 

added to the donor’s adjusted basis to determine the recipient’s 

original basis. If the FMV of a gift (at the time when the gift 

was made) is less than the donor’s adjusted basis, then the recipient’s original basis for loss purposes is the FMV.

Bargain Sales. A bargain sale is the intentional sale of an asset for less than its FMV on the date of the sale. The difference 

between the price paid by the buyer and the FMV is deemed to 

be a gift. For bargain sales made after 1976, the buyer’s basis in 

the asset is the greater of the amount he or she paid or the seller’s basis in the asset at the time of the sale, plus the portion of 

any Federal or State gift tax paid that was due to the difference 

between the seller’s basis and the property’s FMV at the time 

of the sale. For bargain sales made before 1977, the buyer’s 

basis includes any Federal or State gift tax paid, up to the FMV

of the asset at the time of the sale. As with a gift, if at the time 

of the transfer the FMV of the asset is less than the seller’s adjusted basis, then the buyer’s original basis for loss purposes is 

the asset’s FMV.

Other Types of Acquisition. There are several other, less common, ways of acquiring property, including nontaxable or partly 

taxable exchanges, discussed in chapter 6, and replacement of 

involuntarily converted property on which gain is recognized, 

discussed in chapter 7. See these chapters for descriptions of 

how to compute the basis of these types of property. For a discussion of the basis of property acquired in other ways, see Internal Revenue Service (IRS) Publication 551, Basis of Assets.

Allocation of Original Basis

Sales contracts and other documents transferring forest property 

often do not list separate prices or values for the land, timber, and 

other assets when these are acquired together in a single transaction. The total original basis in such situations must then be allocated among the various assets in proportion to the separate FMV

of each on the date of acquisition. Example 4.1 illustrates and explains the allocation procedure. This requirement applies no matter when the allocation actually is made—even if it is done many 

years after the acquisition. If the timber represented a significant 

part of the total value of the property when it was acquired, but its 

actual quantity and value as of that date are unknown, a forester’s

help probably will be needed to make these determinations. Only 

timber with an FMV on the date of acquisition should be included 

in the basis valuation. This means that if the allocation is being 

made later, the timber volume at the time of allocation must be 

reduced by the amount of growth that occurred since the timber 

was acquired.

You bought 100 acres of forest land in 2008. The contract price was 

$116,000, but you also paid $1,000 to have the boundaries surveyed, 

$800 for a title search and closing costs, and $1,500 to have the 

timber cruised. Therefore, your total acquisition cost was $119,300.

The timber cruise determined that the tract at the time of purchase 

contained 1,000 cords of merchantable pine pulpwood on 90 

acres. The remaining 10 acres consisted of naturally seeded young 

growth (trees of premerchantable size) that contributed to the value 

of the property. The FMV of the merchantable timber on the date of 

purchase was $26 per cord. The young growth had an FMV of $200 

per acre. The FMV of the land itself, not considering the timber, was 

$800 per acre. Therefore, the sum of the separate FMVs of all the 

Determination of Cost Basis

Example 4.1.—Allocation of Original Basis.

Asset

Fair market 

value

Proportion of total fair 

market value

Original 

cost basis

Land $ 80,000 74.08% $ 88,377

Young growth 2,000 1.85% 2,207

Merchantable timber 26,000 24.07% 28,716

Total $108,000 100.00% $119,300

assets purchased was $108,000. In this case, as is very often 

the situation, the total of the separate FMVs of the various assets 

purchased does not equal the contract price.

Your original cost basis for each of the land, the merchantable timber, 

and the young growth can now be calculated by determining the 

proportion of the total FMV represented by each and multiplying that 

ratio by the total acquisition cost. For example, dividing the FMV of the 

merchantable timber by the total FMV ($26,000 ÷ $108,000 = 0.2407 

or 24.07%), and then multiplying the total acquisition cost by 24.07% 

($119,300 x 0.2407), results in an original cost basis of $28,716 

for the merchantable timber. The original cost basis for each of the 

assets, determined in exactly the same way, is shown in the following 

tabulation and is reported on Part I of IRS Form T (Timber) (fig. 4.1).
Forest Landowners’ Guide to the Federal Income Tax 11

Figure 4.1.—IRS Form T (Timber), Part I: Acquisitions.
12 Forest Landowners’ Guide to the Federal Income Tax

Establishment of Accounts

After determining original basis, a separate account should be 

established for each of the major categories of capital assets

associated with the forest property. The accounts you should 

establish are discussed in the following paragraphs.

Land Account. Assets that are placed in the land account are 

the land itself and nondepreciable land improvements. Nondepreciable land improvements include earthwork of a permanent 

nature, either acquired with the property or constructed later. 

Examples are roadbeds of permanent roads (roads with an indefinite useful life to the landowner), land leveling, and earthen 

impoundments such as dams. In general, their basis, like that of 

the land itself, can be recovered only when the land is sold or 

otherwise disposed of. The procedure outlined in Example 4.1 

should be used to allocate basis to the land account when forest 

land is acquired.

Depreciable Land Improvement Account. Depreciable land 

improvements include bridges, culverts, graveling, fences, and 

other nonpermanent structures and improvements. Temporary 

roads (roads with a determinable useful life to the landowner), 

such as those to be abandoned after completion of a logging 

operation, may also be depreciated as discussed under “Depreciation and the IRC Section 179 Deduction,” later in this chapter. The costs of constructing temporary firebreaks are treated 

the same as those for establishing temporary roads. 

Timber Account. The timber account should include, if applicable, separate subaccounts for merchantable timber, young 

growth (trees of premerchantable size acquired with the land), 

and plantations (planted or artificially seeded trees of premerchantable size established after acquisition of the land). Separate subaccounts within each of these categories can also be 

established using other criteria—such as species, timber type, 

and location. The timber account—or each subaccount if these 

criteria are used—should contain two entries, one showing the 

quantity of timber and the other its dollar or cost basis. For 

merchantable timber, the quantity is shown in volume measurement terms, such as cords or thousand board feet (MBF). For 

premerchantable timber, the quantity is shown as number of 

acres. At the time forest land is acquired, a reasonable amount 

of the basis is required to be allocated to young growth if it 

contributes to the overall value of the property.

The structure of your timber accounts has significance for casualty loss purposes, discussed in chapter 7. For timber casualty 

loss purposes, the single identifiable property (SIP) damaged 

or destroyed is the block—the record-keeping unit you use to 

keep track of your timber basis—which is affected by the casualty. The maximum amount you can deduct for a loss is your 

adjusted basis in the affected block, so having your timber basis 

divided among several blocks rather than only one limits the 

amount you can deduct in the event of a loss.

As with the land, the procedure outlined in Example 4.1 also 

should be used to allocate basis to the timber accounts when 

timber is acquired together with other assets. It is important to 

remember that basis allocation must be made with reference to 

the relative FMV of all the separate capital asset classes that 

comprise the property at the time of its acquisition. If only 

standing timber or cutting rights are acquired, all related costs 

should be posted to the timber account.

The quantity of merchantable timber to be entered in the timber 

account should be the volume that the tract would have produced if all the merchantable timber had been cut and processed 

on the date of acquisition in accordance with the prevailing local utilization standards at that time. As explained previously, 

the quantity of merchantable timber should be expressed in 

terms of cords, MBF, or other standard unit of timber measure 

used in the region.

The plantation and young-growth subaccounts reflect the 

establishment of timber stands by planting or by natural or 

artificial seeding (see the summary of Revenue Ruling (Rev. 

Rul.) 75-467, appendix A). As mentioned previously, most 

timber establishment costs are required to be capitalized. Establishment costs include funds spent to prepare a site for tree 

planting or seeding, for seedlings and tree seeds, establishment-related fees paid to consulting foresters, and for hired 

labor and supervision. The term hired labor includes family 

members without an ownership interest in the property who 

are actually paid for their services, but it does not include you. 

In certain cases, hired labor may include your spouse (see 

chapter 9, “Treatment of Spouses”). You, as a taxpayer, cannot 

capitalize the cost of your own labor.

Site preparation costs are those incurred for brush, weed, and 

stump removal and for leveling and conditioning the land to 

afford good growing conditions and to facilitate planting or 

seeding. They also include the costs of killing or removing cull 

and low-value trees to facilitate the natural regeneration of desired species, the baiting of rodents, fencing, and other activities necessary to reduce animal damage, such as that from deer 

browsing. Other related costs that must be capitalized include 

the allocable depreciation charges attributed to equipment used 

in site preparation, planting and seeding—such as tractors, 

trucks, and tree planters. Depreciation is discussed in detail in 
Forest Landowners’ Guide to the Federal Income Tax 13

the “Depreciation and the IRC Section 179 Deduction” section 

later in this chapter. Some expenditures made after seeding or 

planting are also establishment costs, such as the cost of brush 

and weed control in a young-growth stand (see the summary of 

Rev. Rul. 76-290, appendix A).

The costs of replanting or reseeding after seedling mortality, such as death by drought or fire, also must be capitalized. 

Depending on the cause of death, however, part or all of the 

loss may perhaps be claimed as an income tax deduction, as 

explained in chapter 7.

As does section 194 of the Internal Revenue Code (IRC), IRC 

section 175 provides for the current deduction of certain tree 

establishment costs for those taxpayers engaged in the business of farming. Forestry or the raising of timber, however, is 

specifically excluded from the definition of farming. Nevertheless, section 175 provides that a taxpayer engaged in the business of farming may elect to currently deduct certain soil and 

water conservation expenditures that otherwise would have to 

be recovered through normal capitalization procedures. Expenses for tree planting (including commercial timber species)

incurred under the U.S. Department of Agriculture (USDA)

Conservation Reserve Program (CRP) are among those that 

qualify. The expenditures, however, must be consistent with 

a plan approved by the USDA Natural Resources Conservation Service office for the area where the land is located or by 

a comparable State agency. The limit on the amount that can 

be deducted in any 1 year is 25 percent of the taxpayer’s gross 

income from farming during that year.

Volume and value entries from the young-growth and plantation subaccounts should be transferred to an existing or new 

merchantable timber subaccount after the trees in those accounts become merchantable. The dollar amount and the 

number of units are added directly to the merchantable timber 

account as shown in Example 4.2.

Equipment Accounts. Accounts also should be established for 

In 2011, you remeasured the timber you bought in Example 4.1 and 

determined that the young growth on the 10 acres had reached 

merchantable size with a total volume of 80 cords. Therefore, you transferred the dollar amount shown in the young-growth subaccount, and 

the number of units, to the merchantable timber subaccount. Thus, the 

closing 2011 (opening 2012) dollar balance in the merchantable timber 

subaccount became $30,923 ($28,716 + $2,207). The dollar balance 

Example 4.2.—Adjustment of Timber Accounts.

depreciable equipment and machinery. The accounts typically 

will consist of a separate subaccount for each item or class of 

items, such as power saws, tractors, trucks, and planting machines. The basis of such items should be adjusted (increased) 

by any amounts spent for major repairs that significantly increase their value or prolong their life. The basis of machinery 

and equipment is recovered through depreciation allowances as 

discussed later in this chapter.

Reforestation Tax Incentives

The IRC provides specific exceptions to the general rule that 

reforestation costs must be capitalized for recovery when the 

timber is disposed of.

Deduction

Qualified reforestation expenditures (or afforestation in the case 

of planting or seeding nonforested land) paid or incurred in a 

tax year to a maximum of $10,000 per qualified timber property 

(QTP) can be immediately deducted by all taxpayers, except 

trusts. This provision became effective on October 23, 2004, 

under IRC section 194(b). The 10-percent investment tax credit

for reforestation costs ended after October 22, 2004, and is no 

longer available.

In the case of a married individual filing a separate return, the 

maximum yearly deduction is $5,000 per QTP. In the case of 

a partnership, the $10,000 maximum yearly deduction applies 

both to the partnership and to each partner; in the case of a 

Subchapter S corporation, it applies both to the corporation and 

to each shareholder. For purposes of the deduction, each QTP 

must have a unique stand identifier and may not be combined 

with any other QTP account for the purpose of calculating 

depletion or casualty loss deductions (chapters 5 and 7). In lieu 

of electing to deduct of all or part of the eligible costs, the costs 

may be amortized as discussed in the following section

in the young-growth subaccount was reduced to $0. The remeasurement also indicated that the merchantable timber on the 90 acres had 

grown by 150 cords. The closing 2011 (opening 2012) volume balance in 

the merchantable timber subaccount therefore was 1,230 cords (1,000 

cords + 80 cords + 150 cords). As required, you reported the transfers 

using Part II of IRS Form T (Timber) (fig. 4.2).
14 Forest Landowners’ Guide to the Federal Income Tax

Figure 4.2.—IRS Form T (Timber), Part II: Timber Depletion.
Forest Landowners’ Guide to the Federal Income Tax 15

Amortization

Qualified reforestation costs incurred—without limit—in excess of the annual outright deduction discussed previously can 

be amortized (deducted over a set period) over 84 months (actually 8 tax years, as explained in “Electing Amortization and 

Computing the Deductions” later in this chapter), under IRC 

section 194(a). This treatment also has been available since 

October 23, 2004, and applies to all taxpayers, including trusts. 

The latter can amortize all eligible costs, not only those in excess of the annual $10,000 limit per QTP. To qualify, the costs 

in excess of the outright deduction limits must be capitalized 

in a separate reforestation account for each eligible QTP. Any 

eligible amounts that you elect not to deduct under IRC section 

194(b) may be amortized under section 194(a).

Qualified reforestation costs, for the purposes of both the deduction and amortization, are the direct expenses incurred in 

establishing a stand of timber—whether by planting, seeding, 

or natural regeneration. Expenditures for timber stand improvement (TSI) practices in established stands do not qualify for 

either the deduction or amortization. In general, these expenses 

are incurred for maintenance of the stand, however, and thus 

are eligible for deduction as a current expense, subject to the 

passive loss rules—as discussed in the “Operating Expenses” 

section later in this chapter. Alternatively, they may be capitalized and deducted when the timber is cut, sold, or otherwise 

disposed of—as discussed in the “Carrying Charges” section 

later in this chapter.

Qualifications for Deduction and 

Amortization

To qualify for both the deduction and amortization, the reforested or afforested property must be at least 1 acre in size and 

be located in the United States. The site must be held by the 

taxpayer for planting, cultivating, caring for, and cutting of 

trees for sale or for use in producing commercial timber products. Both owned and leased properties qualify.

Christmas tree establishment expenditures do not qualify for 

either the deduction or amortization. Similarly, the costs of 

planting trees in shelterbelts or windbreaks, or of planting 

trees primarily for nut production or for sale as ornamentals, 

do not qualify.

Reforestation expenditures eligible for the deduction and 

amortization do not include costs reimbursed under a government cost-sharing program, unless the reimbursed amount is 

included in the recipient’s gross income. If the recipient includes the cost-sharing payment in his or her gross income, the 

You own 120 acres of timberland near your home and a second 

tract of 40 acres in another county 80 miles away. You reforested 

100 acres of the 120 acre property during the tax year at a cost 

of $120 per acre, or a total cost of $12,000. In addition, you 

reforested the entire 40 acre tract at a cost of $100 per acre, or a 

total cost of $4,000. No cost-sharing payments were received for 

either tract.

Each of the two properties has a unique stand identifier and can 

be considered as a separate QTP. Therefore, when you file your 

income tax return for the year in question, you can deduct outright 

$10,000 of the $12,000 expense as well as all of the $4,000 expense. The election for the deductions and the entries themselves 

are made in IRS Form T (Timber), Part IV, as explained previously. 

You elect to amortize the balance of $2,000 on IRS Form 4562, 

Part VI, and complete Form T (Timber), Part IV, line 4b, also as 

explained previously. One-fourteenth of the $2,000 ($142.86) is 

deducted in the first year. During each of the next 6 years, $285.71 

(one-seventh of $2,000) would be deducted, and the remaining 

$142.86 would be deducted in the 8th year.

Example 4.3.—Calculating Reforestation Deductions. 

total reforestation cost (including the amount reimbursed by the 

cost-sharing payment) qualifies for both provisions. Reforestation costs incurred under the CRP program, including the costsharing payments received if reported as income, are eligible 

for both the deduction and amortization if not deducted under 

IRC section 175 as discussed previously. The tax treatment of 

cost-sharing payments is discussed in chapter 5.

Example 4.3 demonstrates how to calculate the reforestation 

deduction and amortization.

Reporting Procedures

Both the outright deduction of up to $10,000 of annual reforestation expenditures per QTP ($5,000 for a married taxpayer 

filing separately) and the 84-month amortization must be specifically elected in writing on a timely filed return, including extensions, for the tax year in which the expenditures were made. 

The elections cannot be made on an amended return. After an 

election is made, however, corrections can be made or missed 

deductions taken on amended returns. See section 322 of IRS 

Notice 2006-47 for additional information.

Electing the Deduction. If you are required to file IRS Form T 

(Timber), you can elect to take the outright deduction by completing Part IV and filing it with your income tax return. Each 

QTP for which qualified costs were incurred during the year must 

be listed and identified separately on line 1. The combined total 

to be deducted for all identified QTPs is entered on line 4a. See 

chapter 5, “IRS Form T (Timber),” for information about when 

you are required to file Form T (Timber).

If you are not required to file IRS Form T (Timber), you still can 

elect to take the outright deduction by filing a statement on a plain 

piece of paper with your tax return that shows (1) the unique stand 
16 Forest Landowners’ Guide to the Federal Income Tax

identifier of each QTP for which you are taking a deduction, 

(2) the total number of acres reforested during the tax year, (3) the

nature of the reforestation treatment, and (4) the total amounts of 

qualified reforestation expenses eligible to be amortized under 

IRC section 194(a) or deducted under IRC section 194(b).

Electing Amortization and Computing the Deductions. To 

make the amortization election, complete and attach IRS Form 

4562: Depreciation and Amortization to your income tax return. 

The required information and deductions should be entered in 

Part VI of the form, which concerns amortization. If reforestation 

expenditures that are amortized are incurred in more than 1 year, 

a separate schedule must be maintained for each year and reported on Form 4562, Part VI, according to the instructions. In addition, complete and attach IRS Form T (Timber), Part IV, line 4b. 

A half-year convention applies to amortization deductions. This 

means that only one-fourteenth of the eligible cost can be deducted the 1st year. One-seventh of the eligible cost is deducted 

in each of years 2 through 7, and the remaining one-fourteenth in 

the 8th tax year (Example 4.3).

Taking the Deductions. The form used to report both the outright deductions and amortization deductions depends on your 

status as a taxpayer. If you file as an investor rather than as a 

business, show the deductions on the line for adjustments to 

gross income on the bottom of the front page of IRS Form 1040

by writing “RFST” (which means reforestation) and the total deduction amount on that line. Then add the deduction to the other 

adjustments to determine total adjustments to gross income. Do 

not list either outright deductions or amortization deductions as 

miscellaneous itemized deductions on Form 1040, Schedule A. 

If you are a sole proprietor and you treat your timber holdings as 

a business (chapters 5 and 12), take the deductions on the “other 

expenses” line on the first page of IRS Form 1040, Schedule C: 

Profit or Loss From Business (Sole Proprietorship), as explained 

on the form’s second page. If you qualify as a farmer, take the 

deductions on the “other expenses” line of IRS Form 1040, 

Schedule F: Profit or Loss From Farming.

Disposal Within 10 Years. If any of the trees established are 

disposed of within 10 years, for example, if the land is sold, all 

the taxes saved by amortization deductions—but not the taxes 

saved by the outright deduction—previously claimed with 

respect to those particular trees are subject to recapture as ordinary income to the extent of any gain realized from the disposal. There is no recapture, however, if the property is disposed of 

by gift; and, in general, recapture may not occur with respect to 

a transfer at death, like-kind exchange, involuntary conversion, 

or certain tax-free transfers, such as a transfer to a corporation 

controlled by the taxpayer.

Depreciation and the IRC Section 

179 Deduction

Many forest owners have a substantial investment in machinery, 

equipment, buildings, and land improvements such as bridges 

and fences. These items depreciate (lose value) over time because of wear and tear, age, deterioration, and obsolescence. The 

IRC permits owners to take depreciation deductions to recover 

their investment in qualified property, as long as it meets three 

conditions. The property must be (1) used in a business or alternatively held for the production of income as an investment, 

(2) have a determinable useful life longer than 1 year, and (3) be 

something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes. Part or all of the cost of 

depreciable property that is used in a business also may qualify 

for deduction in the year of purchase under IRC section 179.

This section discusses the basics of depreciation deductions and 

the IRC section 179 deduction as they affect forest landowners 

and timber operators. Most of the information is summarized 

from IRS Publication 946, How to Depreciate Property. Fine 

points and exceptions that affect other types of businesses and 

investments are omitted. Readers who participate in nonforest 

and nontimber activities should consult Publication 946, as well 

as their tax advisor. IRS Publications 225, Farmer’s Tax Guide;

334, Tax Guide for Small Business; and 534, Depreciating 

Property Placed in Service Before 1987, address special aspects 

of depreciation. IRS Publication 544, Sales and Other Dispositions of Assets, and Publications 946 and 534 also address special aspects of depreciation recapture.

Depreciation Deduction

You, as a forest owner, can depreciate most property used on 

your forest land if you hold the property either as a business 

or as an investment for the production of income. Property acquired either new or used can be depreciated. Land cannot be 

depreciated, but land improvements with a determinable useful 

life—such as fences, bridges, culverts, buildings, temporary 

roads, and the surfaces of permanent roads—can be depreciated. Unless a specific election is made to use an accepted 

alternative method, most tangible property (items that can be 

seen or touched) acquired after 1986 must be depreciated using 

the Modified Accelerated Cost Recovery System (MACRS), 

which was established under IRC section 168 by the 1986 Tax 

Reform Act (P.L. 99-514). Property that was placed in service 

before 1987 and is being depreciated by another method, such 

as the Accelerated Cost Recovery System (ACRS), cannot be 

changed to MACRS.
Forest Landowners’ Guide to the Federal Income Tax 17

The MACRS General Depreciation System (GDS) divides 

tangible personal and real property into a number of different 

classes. These property classes establish the recovery period 

(number of years) over which the basis of a depreciable asset 

can be recovered. In general, the class that a particular item 

is assigned to is determined by its class life. Some types of 

property must be depreciated using the MACRS Alternative 

Depreciation System (ADS), which generally provides for 

longer recovery periods and lower depreciation deductions. 

ADS must be used for (1) listed property (see “Depreciation 

Caps for Listed Property,” later in this section) used 50 percent or less of the time in a qualified business use, (2) tangible 

property used predominantly outside the United States during 

the year, (3) tax-exempt use property, (4) tax-exempt bond financed property, (5) property used predominantly in a farming

business and placed in service during a tax year in which an 

election is made not to apply the uniform capitalization rules

under IRC section 263A to certain farming costs, (6) property 

imported from a foreign country for which an Executive Order 

is in effect because the country maintains trade restrictions or 

engages in other discriminatory acts, and (7) property covered 

by an election to use ADS made under IRC section 168(g)(7). 

Table 4.1 shows the GDS and ADS recovery periods for types 

of property commonly associated with forest operations.

You should be aware that an election to use ADS for any item 

in a property class also applies to any other items in that class 

that are placed in service during that year. For this purpose, the 

election cannot be revoked.

To calculate the MACRS deduction for property, you first must 

know its basis, its recovery period, its placed-in-service date, 

which convention to use, and which depreciation method to use. 

Each of these items is discussed in the following paragraphs.

Basis. Basis, covered earlier in this chapter, is the measure of 

your investment in property for tax purposes. Your original basis in property that you purchase is the total cost of acquisition, 

which includes cash payments, assumed debt and settlement 

fees and costs.

Recovery Period. The recovery period is the number of years 

over which property in a given class is depreciated, as shown in 

table 4.1. GDS divides most types of tangible depreciable property into classes with recovery periods of 3, 5, 7, 10, 15, or 20 

years. Residential rental property has a recovery period of 27.5 

years, and nonresidential real property has a recovery period of 

39 years (31.5 years if the property was placed in service before 

May 13, 1993). ADS has more recovery periods, which extend 

for as long as 50 years.

Placed-in-Service Date. The placed-in-service date is the date 

at which property becomes ready and available for a particular 

use, regardless of whether the property actually is put in use at 

that time and regardless of whether the use is associated with 

a trade or business, production of income (investment), a taxexempt activity, or a personal activity.

Convention. A convention is an assumption for accounting purposes about when during the year property is placed in service 

Property type

Recovery period

GDS ADS

Table 4.1.—Recovery periods under the Modified Accelerated Cost Recovery System GDS and ADS for types of property commonly 

associated with forest operations.

Over-the-road (semi) tractors 3 4

Computers and their peripheral equipment; light general purpose (pickup) trucks 5 5

Logging machinery and equipment and road building equipmentused by logging and sawmill 

operators and pulp manufacturers for their own account; portable sawmills; over-the-road trailers; 

typewriters, calculators, adding and accounting machines, copiers, and duplicating equipment

5 6

Office furniture, fixtures and equipment, such as desks, files, safes,and communications equipment; 

machinery, equipment, and fences used in agriculture, animal husbandry, and horticultural services

7 10

Single-purpose agricultural or horticultural structures 10 15

Land improvements such as drainage culverts, bridges, nonagricultural fences, bridges, temporary 

roads, and the surfaces of permanent roads

15 20

Farm buildings (other than single-purpose agricultural and horticultural structures) 20 25

Residential rental property 27.5 40

Nonresidential real property placed in service before May 13, 1993 31.5 40

Nonresidential real property placed in service after May 12, 1993 39 40

ADS = Alternative Depreciation System. GDS = General Depreciation System. 

Source: Adapted from IRS Publication 946, Chart 2 and Table B-1
18 Forest Landowners’ Guide to the Federal Income Tax

or disposed of. The three conventions under MACRS are (1) the 

half-year convention, (2) the mid-quarter convention, and (3) the 

mid-month convention. Which one is used depends on the type 

of property and its placed-in-service date. In most cases, the 

half-year convention is used for property other than residential 

rental property and nonresidential real property. Under the halfyear convention, property is assumed to be placed in service 

or disposed of at the midpoint of the year. The mid-quarter

convention must be used for property that otherwise would 

be depreciated using the half-year convention if more than 40 

percent of the depreciable bases of all such property placed in 

service during a year is placed in service during the last quarter. 

Before making the 40-percent test, the depreciable basis of the 

property for the tax year it is placed in service should first be 

reduced by any amount the taxpayer properly elects to treat as 

an expense under IRC section 179 as discussed in the next section. The mid-month convention is used for residential rental 

property and nonresidential real property. Under the mid-month 

convention, property is assumed to be placed in service or disposed of at the midpoint of the month.

Depreciation Method. Depreciation method is the specific 

procedure used to calculate the depreciation deduction. The five 

depreciation methods under MACRS are (1) the 200 percent 

declining balance method over the GDS recovery period, (2) the 

150 percent declining balance method over the GDS recovery 

period, (3) the straight line method over the GDS recovery period, 

(4) the 150 percent declining balance method over the applicable 

ADS recovery period (for certain property placed in service before 

1999), and (5) the straight line method over the applicable ADS 

recovery period. The 200 and 150 percent declining balance 

methods change to the straight line method at the point in time 

when doing so yields a greater deduction. Which depreciation 

method to use depends on what class a particular asset is in, what 

type of property it is, and whether an election is made to use the 

prescribed method or an acceptable alternative method. Table 4.2 

summarizes the choices in terms of the property’s GDS recovery 

period. In general, the prescribed method provides for a larger 

front-end deduction and a shorter recovery period than the alternative methods.

The following are some important additional points to note 

about depreciation:

Maintenance Versus Investment. Maintenance is a deductible business expense; but the cost of a repair or replacement 

part that increases the value of an item, makes it more useful, 

or lengthens its life must be capitalized and recovered through 

depreciation.

Idle Property. A scheduled depreciation deduction must be 

claimed for depreciable property, even if it is temporarily idle, 

or the deduction is permanently lost.

Equipment Used To Build Capital Improvements. Depreciation on equipment used to build or establish the taxpayer’s 

own capital improvements cannot be deducted. Instead, it must 

be added to the basis of the improvement. A forestry example 

would be that portion of the depreciation on a tree planting machine or tractor applicable to the planting operation. It must be 

added to the basis of the plantation subaccount.

Basis Adjustments. The basis in depreciable property must be 

reduced by the full amount of depreciation you are entitled to 

deduct, even if you do not take the deduction.

Incorrect Depreciation Deductions. An incorrect depreciation 

deduction can be corrected by filing an amended tax return—

subject to the rules for filing amended returns—to correct 

GDS recovery period Depreciation methods

Nonfarm 3-, 5-, 7-, and 10-year property 200% declining balance over the GDS recovery period—prescribed method

150% declining balance over the GDS recovery period—alternative method

Straight line over the GDS recovery period—alternative method

Straight line over the applicable ADS recovery period—alternative method

Farm 3-, 5-, 7-, and 10-year propertya 150% declining balance over the GDS recovery period—prescribed method

Straight line over the GDS recovery period—alternative method

Straight line over the applicable ADS recovery period—alternative methodb

15- and 20-year farm or nonfarm property 150% declining balance over the GDS recovery period—prescribed method

Straight line over the GDS recovery period—alternative method

Straight line over the applicable ADS recovery period—alternative methodd

27.5-, 31.5-, and 39-year property Straight line over the GDS recovery period—prescribed method

Straight line over the applicable ADS recovery period—alternative method

ADS = Alternative Depreciation System; GDS = General Depreciation System.

Source: IRS Publication 946

a

 Except for trees and vines bearing fruit or nuts, which are depreciated under GDS using the straight line method over a recovery period of 10 years. b Required for farm property used when an election not to apply the uniform capitalization rules is in effect.

Table 4.2.—Prescribed and accepted alternative depreciation methods for property, by GDS recovery period.
Forest Landowners’ Guide to the Federal Income Tax 19

mathematical errors, posting errors, or the amount of depreciation 

for property for which you have not adopted a method of accounting. If you deduct an incorrect amount of depreciation for 

an item in 2 consecutive years, however, the IRS considers that 

you have adopted a method of accounting for that property. See 

IRS Publication 946 for the steps required for a particular situation to obtain IRS consent to change the method of accounting.

Missed Depreciation Deductions. If a taxpayer fails to take 

a depreciation deduction on a particular tax return, it can be 

taken on an amended return, subject to the rules for filing 

amended returns.

General Asset Accounts. Items of property that are placed in 

service in the same tax year and are in the same asset class, 

have the same recovery period, and are being depreciated under 

the same method and convention can be combined in a general 

asset account. The election to use a general asset account must 

be made on a timely filed tax return (including extensions) for 

the year the items are placed in service. Make the election by 

typing or printing “GENERAL ASSET ACCOUNT ELECTION MADE UNDER SECTION 168(i)(4)” at the top of IRS 

Form 4562.

Items Used for Both Business/Investment and Personal 

Use. Property held for business or investment purposes, as well 

as for personal use, can still be depreciated to the proportionate extent of the time of the business or investment use. If the 

business or investment time of use is less than one-half of the 

total, however, the item must be depreciated by the straight line 

method using ADS.

Calculation of Depreciation Deductions. Depreciation deductions can be calculated by hand, but it is much easier to use 

the MACRS percentage tables provided in IRS Publication 

946. The four rules to remember in using the tables are (1) the 

rates in the tables apply to the property’s original (unadjusted) 

basis; (2) the tables cannot be used in a short tax year; (3) after 

beginning to use the tables to depreciate an item, the tables 

must continue to be used unless an adjustment is made to the 

basis other than for depreciation, or is made for an addition or 

improvement to the property; and (4) if the basis is adjusted for 

any other reason, the tables cannot continue to be used.

MACRS Percentage Tables. Tables 4.3 through 4.5 reproduce 

three commonly used MACRS percentage tables from IRS 

Publication 946. Table 4.3 shows the 200 percent declining 

balance depreciation rates for nonfarm property with 3-, 5-, 7-, 

Depreciation rate for recovery period

Year 3-year 5-year 7-year 10-year 15-year 20-year

1 33.33% 20.00% 14.29% 10.00% 5.00% 3.750%

2 44.45 32.00 24.49 18.00 9.50 7.219

3 14.81 19.20 17.49 14.40 8.55 6.677

4 7.41 11.52 12.49 11.52 7.70 6.177

5 11.52 8.93 9.22 6.93 5.713

6 5.76 8.92 7.37 6.23 5.285

7 8.93 6.55 5.90 4.888

8 4.46 6.55 5.90 4.522

9 6.56 5.91 4.462

10 6.55 5.90 4.461

11 3.28 5.91 4.462

12 5.90 4.461

13 5.91 4.462

14 5.90 4.461

15 5.91 4.462

16 2.95 4.461

17 4.462

18 4.461

19 4.462

20 4.461

21 2.231

Table 4.3.—200 percent declining balance depreciation rates for nonfarm property with 3-, 5-, 7-, 10-, 15-, and 20-year GDS 

recovery periods using the half-year convention.

GDS = General Depreciation System.

Source: IRS Publication 946, Table A-1
20 Forest Landowners’ Guide to the Federal Income Tax

Table 4.4.—200 percent declining balance depreciation rates for nonfarm property with 3-, 5-, 7-, 10-, 15-, and 20-year GDS 

recovery periods using the mid-quarter convention for property placed in service in the fourth quarter.

Depreciation rate for recovery period

Year 3-year 5-year 7-year 10-year 15-year 20-year

1 8.33% 5.00% 3.57% 2.50% 1.25% 0.938%

2 61.11 38.00 27.55 19.50 9.88 7.430

3 20.37 22.80 19.68 15.60 8.89 6.872

4 10.19 13.68 14.06 12.48 8.00 6.357

5 10.94 10.04 9.98 7.20 5.880

6 9.58 8.73 7.99 6.48 5.439

7 8.73 6.55 5.90 5.031

8 7.64 6.55 5.90 4.654

9 6.56 5.90 4.458

10 6.55 5.91 4.458

11 5.74 5.90 4.458

12 5.91 4.458

13 5.90 4.458

14 5.91 4.458

15 5.90 4.458

16 5.17 4.458

17 4.458

18 4.459

19 4.458

20 4.459

21 3.901

GDS = General Depreciation System.

Source: IRS Publication 946, Table A-1

Month property placed in service

Year 1 2 3 4 5 6 7 8 9 10 11 12

1 2.461% 2.247% 2.033% 1.819% 1.605% 1.391% 1.187% 0.963% 0.749% 0.535% 0.321% 0.107%

2–39 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564

40 0.107 0.321 0.535 0.749 0.963 1.177 1.391 1.605 1.819 2.033 2.247 2.461

Table 4.5.—Straight line depreciation rates for nonresidential real property with a 39-year recovery period using the mid-month 

convention.

Source: IRS Publication 946, Table A-7a

10-, 15-, and 20-year GDS recovery periods using the half-year 

convention; table 4.4 shows the 200 percent declining balance 

depreciation rates for nonfarm property with 3-, 5-, 7-, 10-, 

15-, and 20-year GDS recovery periods using the mid-quarter 

convention for property placed in use during the fourth quarter; 

and table 4.5 shows the straight line depreciation rates for nonresidential real property with a 39-year recovery period using 

the mid-month convention.

Depreciation Caps for Listed Property. The term listed property refers to certain items that have their own set of depreciation caps if placed in service after 2002. These caps may result 

in lower depreciation deductions than those calculated directly 

from tables 4.3 and 4.4. Listed items are those that can easily 

be used for both business or investment use and for personal 

purposes—including passenger automobiles; certain classes of 

trucks and other vehicles; items such as computer games and 

video-recording equipment generally used for entertainment, 

recreation, or amusement; and computers and related equipment. IRS Publication 946 contains the rules and recordkeeping 

requirements for listed property. With respect to listed property, 

trucks are of particular significance for forest landowners. 

Trucks and vans (including SUVs and minivans built on a truck 

chassis) that are rated at 6,000 pounds or less of gross vehicle 
Forest Landowners’ Guide to the Federal Income Tax 21

weight are listed property. For the 2010 and 2011 tax years, the 

maximum annual deductions for these types of vehicles, based 

on 100 percent use for business or investment, were (1) $11,060 

in year 1 ($3,060 if the taxpayer elected not to claim special 

depreciation); (2) $4,900 in year 2; (3) $2,950 in year 3; and 

(4) $1,775 in all subsequent years. Trucks and vans that have a 

loaded gross vehicle weight of more than 6,000 pounds are not 

subject to these caps and may be depreciated as set out in tables 

4.3 and 4.4.

Examples 4.4–4.6 illustrate the calculation of depreciation 

deductions for a pickup truck purchased in each of two recent 

years for use on a forest property. Note that because of the halfyear convention, it actually takes 6 years to fully depreciate 

property with a 5-year recovery period.

Units of Production Depreciation Method. An election can 

be made to exclude certain timber-related property from the 

MACRS depreciation rules and instead depreciate it using the 

units-of-production method, which is not expressed in terms 

of years. Under this method, the basis in property is recovered 

based on the number of units of output produced each year, 

compared with the total number of units that will be produced. 

Example 4.7 illustrates use of the units-of-production method 

to calculate depreciation deductions for a temporary logging 

road over a 2-year harvest period. To qualify for this treatment, it 

is necessary that the road be built solely to harvest the specified 

Special Depreciation Alowance. 

The Economic Stimulus Act of 2008 (P.L. 110-185) provided a first-year 

special—or bonus—depreciation deduction equal to 50 percent of the 

adjusted basis of qualifying property purchased and placed in service after 

December 31, 2007, and before January 1, 2009 (January 1, 2010, for 

certain property with a long production period). The American Recovery 

and Reinvestment Act of 2009 (P.L. 111-5) and Tax Relief, Unemployment 

Insurance Reauthorization, and Job Creation Act (2010 Tax Relief Act, P.L. 

111-312) together extended the provision an additional 4 years to qualifying 

property purchased and placed in service before January 1, 2013. The 

2010 Tax Relief Act also increased the bonus depreciation deduction to 100 

percent of the adjusted basis of qualifying property placed in service after 

September 8, 2010, and before January 1, 2012.

To qualify for special depreciation, property must be new—not used—

eligible property with the taxpayer as the original purchaser. Eligible property 

includes (1) tangible personal property depreciated under MACRS with a 

recovery period of less than 20 years, (2) water utility property, (3) off-theshelf computer software, or (4) qualified leasehold improvement property. 

Special depreciation cannot be used for property purchased under a 

binding agreement in place before January 1, 2008; property purchased 

from a related person; self-constructed property for which construction 

began before January 1, 2008; or ineligible property, such as property 

owned by a controlled foreign corporation. The special depreciation 

deduction is calculated after any IRC section 179 deduction (see the 

following section). The deduction is not affected by short tax years, and it 

is allowed for both regular and alternative minimum tax purposes (chapter 

9). Regular MACRS deductions for the first and all subsequent years of the 

recovery period are calculated using the basis remaining after the special 

depreciation deduction is taken.

You purchased a new heavy duty pickup truck in August 2007, for 

$25,000 for use entirely in your timber business. Because it had a 

gross vehicle weight of more than 6,000 pounds, the truck was not 

subject to the special vehicle deduction limits for listed property. 

You did not meet the eligibility requirements for the IRC section 179 

deduction, as discussed in the following section. Therefore, from 

table 4.1, you determined that a pickup truck has a 5-year GDS recovery period. From table 4.2 you determined that the 200 percent 

declining balance method is the prescribed depreciation method 

for 5-year nonfarm property. Using the 5-year property column in 

table 4.3, you calculated that your depreciation deduction would 

be $5,000 ($25,000 x 0.2000) for the first year that you owned 

the truck, $8,000 ($25,000 x 0.3200) for the second year, $4,800 

($25,000 x 0.1920) for the third year, $2,880 ($25,000 x 0.1152) 

for the fourth and fifth years, and $1,440 ($25,000 x 0.0576) for the 

sixth year.

Example 4.4

Assume the same facts as in Example 4.4, except you purchased 

the heavy-duty pickup truck in August 2009. Under the provisions 

of the American Recovery and Reinvestment Act of 2009, you 

could take a special depreciation deduction equal to 50 percent of 

the purchase price before beginning the regular MACRS depreciation deductions. Your depreciation deduction would be $15,000 

[($25,000 x 0.5000) + ($12,500 x 0.2000)] for the first year you 

owned the truck, $4,000 ($12,500 x 0.3200) for the second year, 

$2,400 ($12,500 x 0.1920) for the third year, $1,440 ($12,500 

x 0.1152) for the fourth and fifth years, and $720 ($12,500 x 

0.0576) for the sixth year. If you had purchased the truck between 

September 9, 2009, and the end of 2011 you could have taken 

a special depreciation deduction equal to 100 percent of the purchase price, under the provisions of the 2010 Tax Relief Act.

Example 4.5

You spend $10,000 to build a temporary road solely to harvest 480 

thousand board feet (MBF) of timber. This year, 300 MBF of the timber is harvested. The remaining 180 MBF is cut the following year. 

Using the units-of-production method, you can depreciate the cost 

of the road over 2 years. The deduction for the first year is $6,250 

[$10,000 x (300 ÷ 480)], and for the second year it is $3,750 

[$10,000 x (180 ÷ 480)].

Example 4.7.

Assume the same facts as in Example 4.5, except the pickup truck 

you purchased in 2009 had a gross vehicle weight of less than 6,000 

pounds (that is, it was listed property). Your depreciation deduction 

would be capped at $10,960 for the first year you owned the truck, 

$4,800 for the second year, $2,850 for the third year, and $1,775 

each for the fourth, fifth, and sixth years. Therefore, the amount you 

were able to depreciate for the truck would be less than its $25,000 

purchase price ($10,960 + $4,800 + $2,850 + $1,775 + $1,775 + 

$1,775 = $23,935), even if you claimed the first-year special depreciation deduction.

If you used the truck only 70 percent for business purposes, your depreciation deductions would be equal to 70 percent of the amounts 

in the previous examples. As discussed previously, if you do not use 

a truck or other listed property more than 50 percent for business or 

investment purposes during the year, it must be depreciated by the 

straight line method using ADS.

Example 4.6
22 Forest Landowners’ Guide to the Federal Income Tax

timber and be of no further use to the owner of the timber to be 

harvested after the logging is completed. If this requirement is 

met, culverts and bridges as well as temporary logging roads 

can qualify for the units-of-production method.

Reporting Depreciation. Depreciation deductions are reported 

on IRS Form 4562, Parts II, III, and V. Part II is used to classify 

and take the first deduction for property placed in service during the past year. Part III is used to take deductions for property 

placed in service during prior years. Part V is used to report 

business or investment use and calculate the deductions for 

listed property.

The IRC Section 179 Election

Under the provisions of IRC section 179, all or part of the costs 

of certain qualifying depreciable property—so-called section 

179 property—that is acquired for use in a forest operation 

may be deducted currently instead of being recovered by annual depreciation deductions. The limits on the amount that can 

be deducted in a single year are discussed under “Maximum 

Deduction,” later in this section. A section 179 deduction is 

available only for property acquired for use in a trade or business. It is not available for property held for the production of 

income as an investment, nor is it available to estates and trusts. 

The general rule is that the section 179 deduction must be specifically elected on an original tax return filed for the year the 

property is placed in service. The election can be made on an 

amended return only if it is filed within the time prescribed by 

law for filing an original return for that year—including extensions. An exception to the general rule exists, however, for the 

years of 2003 through 2011. During these tax years, a taxpayer 

may make, revoke, or change the election without IRS consent 

on an amended return filed during the period prescribed for 

filing an amended return—in general, 3 years from the filing of 

the original return. The election is made on IRS Form 4562.

Qualifying Depreciable Property. Qualifying IRC section 

179 property includes tangible personal property, single-purpose 

agricultural or horticultural structures, off-the-shelf computer 

software, and certain other types of tangible property. It does not 

include most buildings or their structural components, property 

acquired from related persons or entities, air conditioning or 

heating units, or certain property leased to or used by others or 

used predominantly outside the United States.

Maximum Deduction. The amount of the maximum deduction permitted under IRC section 179 has varied by more than 

20-fold during recent years, from $24,000 in 2001 and 2002 

to $500,000 in 2010 and 2011. Table 4.6 shows the maximum 

deduction and phaseout limit—the maximum investment in 

qualifying property before the deduction begins to be reduced 

(see “Reduction of Maximum Deduction,” immediately following)—year by year from 2001 through 2012, together with the 

controlling legislation. Note, however, that for many vehicles 

exempt from the listed item depreciation caps discussed earlier 

(that is, those with a rated gross vehicle weight more than 6,000 

pounds but not more than 14,000 pounds), the maximum section 179 deduction is set at $25,000.

Year

Maximum 

deduction

Phaseout

limit Controlling legislation

Table 4.6.—IRC section 179 maximum deduction, phaseout limit, and controlling legislation, by year, 2001 through 2012.

2001 24,000 200,000 Small Business Job Protection Act of 1996 (P.L. 104-188)

2002 24,000 200,000 Small Business Job Protection Act of 1996 (P.L. 104-188)

2003 100,000 400,000 Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27)

2004 102,000 400,000 Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27)

2005 105,000 400,000 Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27)

2006 108,000 400,000 Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222)

2007 125,000 500,000 Small Business and Work Opportunity Tax Act of 2007 (P.L. 110-28)

2008 250,000 800,000 Economic Stimulus Act of 2008 (P.L. 110-85)

2009 250,000 800,000 American Recovery and Reinvestment Act of 2009 (P.L. 111-5)

2010 500,000 2,000,000 Small Business Jobs Act of 2010 (P.L. 111-240)

2011 500,000 2,000,000 Small Business Jobs Act of 2010 (P.L. 111-240)

2012 139,000a 560,000b The Tax Relief, Unemployment Insurance Reauthorization, and 

Job Creation Act of 2010 (P.L. 111-312)

a

 $125,000, indexed for inflation after 2010.

b $500,000, indexed for inflation after 2010.
Forest Landowners’ Guide to the Federal Income Tax 23

As of September 30, 2012, the maximum IRC section 179 deduction for 2012 is scheduled to decrease to $125,000, indexed 

for inflation after 2010. For tax years beginning after 2012, the 

maximum deduction is scheduled to return to $25,000 per year 

for all property, without adjustment for inflation. The maximum 

deduction for the current tax year is shown on IRS Form 4562.

Reduction of Maximum Deduction. The maximum deduction 

permitted under IRC section 179 is reduced dollar for dollar 

by the cost of qualified property placed in service during the 

tax year that exceeds a specified investment limitation (but 

not to less than zero). The limits for tax years beginning between 2001 and 2012 are shown in table 4.6. As of September 

30, 2012, for tax years beginning after 2012, the limitation is 

scheduled to return to $200,000 per year, without adjustment 

for inflation. The amount that can be deducted also is limited to 

your combined net taxable income from all trades or businesses 

that are actively conducted by you during the year, including 

income earned as an employee. Eligible costs that cannot be 

deducted in one tax year because of this particular limit can be 

carried forward indefinitely for deduction in later years. In general, you are considered to actively conduct a trade or business 

if you meaningfully participate in its management or operations (see “The Passive Loss Rules,” later in this chapter).

Basis Adjustment. The amount of an IRC section 179 deduction must be subtracted from the basis of the property before 

calculating a depreciation deduction for the property. If two or 

more items of qualifying property are placed in service during a 

year, the deduction can be divided among them as the taxpayer 

wishes. Records should be kept to identify property for which 

a section 179 deduction has been taken, how and from whom it 

was acquired, and when it was placed in service. If business use

of section 179 property fails to exceed 50 percent during any 

year of the item’s depreciation period, a portion of the amount 

expensed is recaptured as ordinary income. Recapture is reported and calculated on Part IV of IRS Form 4797: Sales of 

Business Property.

Example 4.8 shows how to calculate an IRC section 179 deduction and divide it between several items of qualifying property 

purchased in the same year. Example 4.9 is an integrated example that shows the importance of planning your purchases of 

section 179 property. Section 179 deductions are calculated on 

IRS Form 4562.

Special Provision for Disaster Assistance Property. 

The otherwise applicable maximum deduction for IRC section 179 property (i.e., $250,000 for 2009) is increased by up to $100,000 for qualified 

disaster assistance property placed in service in a federally declared disaster area in which the disaster occurred before January 1, 2010. In addition, 

the maximum investment in qualifying section 179 property before the 

deduction begins to be reduced (the phaseout limit) is increased by up 

to $600,000. To qualify for this provision, the property must be placed in 

service after December 31, 2007. See the Federal Emergency Management Agency (FEMA) Web site (http://www.fema.gov/) for a list of federally 

declared disaster areas and IRS Publication 946, How to Depreciate Property, for more detailed information on this provision.

Special Provision for Enterprise Zone Businesses. 

The otherwise applicable maximum deduction for IRC section 179 property (i.e., $500,000 for 2011) is increased by up to $35,000 for any qualified zone property placed in service by an enterprise zone business before 

January 1, 2012. In addition, only 50 percent of the cost of qualified zone 

property placed in service during a year is taken into account when figuring 

the reduction in the maximum section 179 deduction for costs exceeding 

the phaseout limit. See IRS Publications 946, How to Depreciate Property, 

and 954, Tax Incentives for Distressed Communities, for more detailed 

information on this provision.

During 2009 you purchased and placed in service four items of qualifying IRC section 179 property for your forestry operation at a total 

cost of $225,000—a small used pickup truck (meeting the definition 

of a listed item as defined previously) for which you paid $20,000, 

two used tractors for which you paid $65,000 and $60,000 respectively, and a used portable sawmill for which you paid $80,000. 

None of the property is new, so it is not eligible for a special depreciation deduction.

For 2009 the maximum amount deductible under IRC section 179 

was $250,000. On a timely filed return for 2009, you specifically 

elected to expense all $225,000 of the total cost because all the purchases were of qualifying property. Your net taxable income from the 

active conduct of trades and businesses for 2009, however, was only 

$80,000. Because of this, you could only take an $80,000 section 

179 deduction for the year. You applied $60,000 to the sawmill and 

$10,000 to each tractor. You carried forward the remaining $145,000 

($225,000 – $80,000) and used it to determine your section 179 

deduction for 2010 and later years until it was used up.

Example 4.8
24 Forest Landowners’ Guide to the Federal Income Tax

Example 4.9

Also during 2009, Tucker Forrest, a calendar year taxpayer, went deep 

into debt and paid $35,000 for a multipurpose machine shed which 

was available for use in July, $80,000 for a used over-the-road tractor 

which was available for use in August, $55,000 for a used tractor 

which was available for use in September, $25,000 for a new small 

pickup truck which was available for use in October, $120,000 for a 

used skidder which was available for use in November, and $70,000 

for a second used tractor, which was available for use in December. 

For purposes of this example, Forrest’s net taxable income from the 

active conduct of trades or businesses for 2009 is assumed to be 

$75,000.

The machine shed is not qualifying IRC section 179 property because 

it is not a single-purpose agricultural or horticultural structure. Forrest 

could begin depreciating it as nonresidential real property on his 2009 

tax return, however, using the straight line method over a 39-year 

recovery period, as discussed previously.

Only the over-the-road tractor, pickup truck, skidder, and two tractors 

are qualifying IRC section 179 property. Forrest elected to expense, 

under section 179, $250,000 (the maximum allowed for 2009) of the 

total cost of these items. He chose to allocate the deduction to the 

big-ticket items, covering the entire cost of the $120,000 skidder and 

the $80,000 over-the-road tractor, and $50,000 of the cost of the 

second tractor. Because his net taxable income from active trades 

and businesses for 2009 was only $75,000, however, the section 179 

deduction on his 2009 income tax return was limited to that amount 

rather than the $250,000 maximum. He applied $36,000 to the skidder, $24,000 to the over-the-road tractor, and $15,000 to the second 

tractor. He carried forward the remaining $175,000 of the deduction 

($250,000 – $75,000) for use in later years.

Because more than 40 percent of the bases in property that otherwise 

would be depreciated using the half-year convention was placed in 

service during the last quarter of the year, Forrest had to calculate his 

depreciation deductions for the two tractors—even the one purchased 

in September—using the mid-quarter convention rather than the more 

advantageous half-year convention to which they otherwise would 

have been entitled (see the “Convention” section). The calculation is as 

follows: the total depreciable amount was $100,000 ($55,000 on the 

first tractor + $25,000 on the pickup truck + $20,000 on the second 

tractor). The portion of the total depreciable amount attributable to 

items placed in service during the last quarter was $45,000 ($25,000 

on the pickup truck + $20,000 on the second tractor). Dividing 

$45,000 by $100,000 equals 45 percent. As new property the pickup 

truck was eligible for a special depreciation deduction, but as listed 

property the amount of the deduction was limited, as shown in the 

calculation.

Forrest’s 2009 deductions were as follows:

IRC section 179 deduction ................................................... $ 75,000

(Forest’s 2009 deduction was limited to $75,000. He divided it among 

the over-the-road tractor, skidder, and second tractor and carried the 

$175,000 balance of his section 179 deduction forward for use in 

later years)

MACRS depreciation deduction on the machine shed 

(39-year property)................................................................. $ 413

[Use table 4.5: $35,000 x 0.0118 = $413]

MACRS depreciation deduction on the first tractor 

(5-year property)................................................................... $ 2,750

[Use table 4.4: $55,000 x 0.05 = $2,750]

Special depreciation deduction on the pickup truck 

(5-year property)................................................................... $ 8,000

[$25,000 x 0.5 = $12,500; this amount is more than the $8,000 maximum first year special depreciation deduction for listed trucks and vans 

placed in service during 2009, so only $8,000 could be deducted]

MACRS (listed item) depreciation deduction on the pickup truck (5-year 

property)............................................................................... $ 850

[Use table 4.4: ($25,000 – 8,000) x 0.05 = $850; this amount is less 

than the $3,060 maximum first year depreciation deduction for listed 

trucks and vans, so the entire $850 could be deducted]

MACRS depreciation deduction on the second tractor 

(5-year property)................................................................... $ 1,000

[Use table 4.4: ($70,000 – $50,000) x 0.05 = $1,000]

Total IRC section 179 and depreciation deductions .............. $ 88,013

If Forrest had placed the pickup truck in service in September instead of 

October, he could have calculated his depreciation deductions for it and 

the tractors using the half-year convention. The result would have been 

$13,460 more in depreciation deductions for 2009:

IRC section 179 deduction ................................................... $ 75,000

MACRS depreciation deduction on the machine shed 

(39-year property)................................................................. $ 413

[As shown previously]

MACRS depreciation deduction on the first tractor 

(5-year property)................................................................... $ 11,000

[Use table 4.3: 55,000 x 0.20 = $11,000].

Special depreciation deduction on the pickup truck 

(5-year property)................................................................... $ 8,000

[As shown previously]

MACRS (listed item) depreciation deduction on the pickup truck 

(5-year property)................................................................... $ 3,060

[Use table 4.3: ($25,000 – $8,000) x 0.20 = $3,400; this amount is more 

than the $3,060 maximum first year depreciation deduction for listed 

trucks and vans, so only $3,060 can be deducted]

MACRS depreciation deduction on the second tractor 

(5-year property)................................................................... $ 4,000

[Use table 4.3: ($70,000 – $50,000) x 0.20 = $7,000].

Total depreciation and IRC section 179 deductions .............. $ 101,473
Forest Landowners’ Guide to the Federal Income Tax 25

Disposition of Depreciated Property

Disposition is the permanent withdrawal of property from use in 

a trade or business—or from use for the production of income—

by sale, exchange, retirement, abandonment, involuntary conversion, or destruction. If the disposition occurs before the end of 

the item’s recovery period, it is called an early disposition. Regular depreciation deductions cannot continue to be taken for property disposed of early. If you are depreciating the property under 

MACRS, however, you are allowed a deduction for the year of 

the disposition. For items being depreciated using the half-year 

convention, take one-half of the deduction scheduled for the full 

year. For property being depreciated using the mid-quarter convention, multiply the depreciation deduction scheduled for the 

full year by 0.125 if the disposition occurs during the first quarter of the year, 0.375 if it is in the second quarter, 0.625 if in the 

third quarter, and 0.875 if in the fourth quarter. For residential 

rental and nonresidential real property that is being depreciated 

using the mid-month convention, multiply the depreciation deduction scheduled for the full year by a factor equal to the month 

of the disposition, divided by 12.

A disposition of depreciated property for which you receive 

income may result in a recapture tax being due. With a disposition of property depreciated under MACRS—except for residential rental property or nonresidential real property—any depreciation and IRC section 179 deductions that have been taken 

are subject to recapture. Income you receive up to the amount 

of the deductions is taxed as ordinary income. Any income you 

receive that is over and above the property’s restored basis is a 

capital gain. There is no recapture of depreciation deductions 

for dispositions of residential rental property or nonresidential 

real property because these types of property do not qualify for 

a section 179 deduction. All income received over and above 

the basis in such property is a capital gain, but income up to 

the amount of depreciation and section 179 deductions that has 

been taken is taxed as ordinary income. Example 4.10 shows 

how to calculate final-year depreciation deductions and taxable 

income from a disposition of depreciable property (also see 

IRS Publications 946 and 544).

Currently Deductible Costs: 

Operating Expenses and Carrying 

Charges

Timber owners commonly incur costs associated with the dayto-day management of their forest property. Such expenditures 

include, but are not limited to, fees paid to consulting foresters; 

travel expenses directly related to the income potential of the 

property; the costs of timber management activities such as prescribed burning and precommercial thinning; the expenses of 

fire, insect, and disease control and protection; the costs of tools 

having a short useful life; salaries for hired labor; road and firebreak maintenance costs; and professional fees. These types of 

expenditures are commonly called operating expenses. Forest 

landowners also generally incur regularly recurring expenses, 

such as property taxes, and perhaps interest and insurance payments. Such costs, together with certain other expenses related 

to the development and operation of timber properties, are 

termed carrying charges.

Operating expenses and carrying charges that are considered to 

be “ordinary and necessary” expenses of managing, maintaining, 

protecting and conserving forest land may be wholly or partially 

deducted (expensed) each year as incurred, even if the property is 

currently producing no income—provided that the timber growing activity is being engaged in for profit and the expenditures are 

directly related to the income potential of the property.

Under the so-called hobby-loss rule a presumption that an activity is being carried on for profit applies if the property has 

produced income (profit) in at least 3 of the 5 consecutive years 

ending with the current year. If this test cannot be met, however, 

deductions are not automatically denied. Rather, all facts and 

circumstances of the situation are considered in determining 

whether or not a profit motive exists. The term profit includes 

appreciation in the value of assets used in the activity. This 

principle is particularly relevant in the case of timber, which 

is unique in that its appreciation in value—contrary to most 

other assets—is due primarily to physical growth and enhanced 

The facts are the same as in Example 4.9. After using the first tractor 

for a little more than 1 year, Tucker Forrest resold it in December 2010 

for $60,000. He was allowed a 2010 depreciation deduction equal to 

$17,373 [0.875 partial year adjustment x ($55,000 purchase price – 

$2,750 2009 depreciation deduction) x 0.3800 depreciation rate from 

table 4.4] for the tractor under MACRS using the mid-quarter convention. But because the sale constituted an early disposition of the tractor, 

any depreciation and IRC section 179 deductions he had taken for it 

were subject to recapture. These deductions totaled $20,123 ($2,750 + 

Example 4.10

$17,373), making the adjusted basis of the tractor $34,877 ($55,000 – 

$20,123). The gain Forrest realized as a result of the sale is calculated by 

subtracting the adjusted basis of the skidder from the price he received 

for it: $60,000 – $34,877 = $25,123. Of the gain, $20,123—equal to 

the depreciation deductions he had taken for the tractor—was taxable 

as ordinary income, and the remaining $5,000 ($25,123 – $20,123) was 

taxable as a capital gain. See IRS Publication 544 for further discussion 

of dispositions of depreciated property.
26 Forest Landowners’ Guide to the Federal Income Tax

quality over a long period of time. Although a landowner often 

has no net income from forest properties for many years, the 

intent of most owners is to achieve an overall profit once the 

increase in timber value is realized. In some cases, the increase 

in the value of the land can also be considered.

The determination of whether expenses are “ordinary and 

necessary” is generally based on the concept of “industry standard.” If it is common practice for firms with an obvious profit 

motive to incur expenses for a certain timber management 

practice, the practice most likely is “ordinary and necessary.” 

Professionally managed forest investment firms are an example 

of firms with an obvious profit motive.

An expense is directly related to the production of income if it 

is necessary to realize income or will increase potential income. 

If, for example, timber sales are the only foreseeable source 

of income, expenses for the improvement of wildlife habitat

would not be directly related to the production of income. 

Profit is defined to include appreciation in the value of the land 

as well as the timber. Thus, if you have evidence that wildlife 

habitat improvements will increase the market value of your 

forest land, the expense may be directly related to the production of income.

Carrying Charges

As an alternative to currently deducting timber-related expenditures, an election may be made to capitalize them. Strictly 

speaking, only carrying charges may be capitalized. Carrying 

charges are taxes, interest, and certain other expenses related 

to the development and operation of forest properties that may 

be treated as either deductible expenses or capital costs. As a 

practical matter, however, many other deductible timber-related 

costs are considered to be carrying charges. Capitalized carrying charges are added to the timber’s basis and are recovered 

by offsetting gain realized upon the sale or cutting of timber, as 

discussed in chapter 5. Although the IRS regulations governing 

the capitalization of carrying charges do not specifically address timber-related costs, they do set forth general rules that 

are applicable to the capitalization of timber expenditures. The 

rules provide that in the case of “unimproved and unproductive 

real property,” taxpayers may elect—on a year-to-year basis—

to capitalize “annual taxes, mortgage interest, and other carrying charges.” Unimproved real property is generally defined as 

land without buildings, structures, or any other improvements 

that contribute significantly to its value. Forest land is unproductive in any year in which no income is produced from its 

use, such as from timber sales, hunting leases, or sale of products cut from timber. You may not capitalize carrying charges 

incurred in any year that the property is productive.

The regulations additionally provide with respect to real 

property—“whether improved or unimproved, and whether 

productive or unproductive”—that taxpayers may elect to capitalize necessary expenditures associated with development of 

the property up to the time the development is completed. Once 

an election to capitalize “development-related expenditures” is 

made, however, it remains in effect until development is completed. Costs incurred for silvicultural treatments in established 

stands, such as for precommercial thinning, pruning, and other 

timber stand improvement (maintenance) work, fall into this 

category. This means that such costs may be capitalized to the 

timber account if you do it consistently from year to year.

The election to capitalize is made by filing with the original 

tax return for the year for which the election is to be effective a 

written statement on a plain piece of paper indicating the specific expenses that are being capitalized. The election cannot be 

made on an amended return.

The Passive Loss Rules

The extent to which operating expenses and carrying charges 

are currently deductible depends on how you are classified 

under the 1986 Tax Reform Act (P.L. 99-514) with respect to 

ownership and operation of your forest property activity. This 

legislation made a number of significant changes related to 

deductions that are set forth in what are called the passive loss 

rules. These rules apply to activities carried out as a business, 

not to those carried out as an investment.

The passive loss rules govern the extent to which an operating loss from a particular business activity for any given tax 

year can be offset against income from other sources. The passive loss rules apply to individuals, estates, trusts, and to two 

categories of corporations: “personal service corporations” 

(those whose principal activity is the performance of personal 

services that are substantially performed by employee-owners) 

and “closely held C corporations“ (those that are subject to the 

corporate income tax and in which more than 50 percent of the 

value of the stock is owned by 5 or fewer individuals). Except 

for these two types of corporations, the passive loss rules do not 

apply to corporations in general. The passive loss rules also do 

not apply directly to partnerships or Subchapter S corporations, 
Forest Landowners’ Guide to the Federal Income Tax 27

because they are pass-through entities that are not taxed in their 

own right. The rules do, however, apply to deductions passed 

through from partnerships and Subchapter S corporations.

If your timber ownership is subject to the passive loss rules, you 

must determine which of the following two classifications applies to you and your forest property. This determination must 

be made for each tax year. The rules for deducting operating 

expenses and carrying charges vary, depending on which of the 

following categories your timber activity fits (1) timber held as 

part of a trade or business in which you materially participate 

or (2) timber held as part of a trade or business in which you do 

not materially participate, that is, a passive activity.

Timber Held as Part of a Trade or 

Business in Which the Taxpayer Materially 

Participates

In this situation, all operating expenses and carrying charges

for a tax year related to the timber activity are fully deductible

against income from any source as incurred. Credits arising 

from the timber activity also can be applied to taxes arising 

from income from any source.

If total deductions from trade or business activities (including forest property) exceed the taxpayer’s gross income from 

all sources for the tax year, the excess will be a “net operating 

loss.” In general, such losses may be carried back to the 2 preceding tax years; then, if still unused, they can be carried forward for the next 20 tax years.

Material Participation. The law provides that to be materially 

participating, a taxpayer must be involved in operations with 

respect to the property on a basis that is “regular, continuous 

and substantial.” You and your spouse will be treated as one 

taxpayer for purposes of determining whether the material 

participation requirement is met. It does not matter whether 

your spouse owns an interest in the property, or whether you 

file joint or separate tax returns. The IRS regulations provide 

that you will be considered to be materially participating in the 

operation of your timber activity if you meet at least one of the 

following tests:

1. You and your spouse participate in the activity for more 

than 500 hours during the tax year.

2. You and your spouse’s personal participation in the activity 

constitutes substantially all the participation (including that 

of all other individuals) for the tax year.

3. You and your spouse participate in the activity for more 

than 100 hours during the tax year and no other individual 

participates more.

4. You and your spouse’s aggregate participation in all of your 

“significant participation activities,” including your timber 

activity, exceeds 500 hours during the tax year. An activity 

is a “significant participation activity” if it is a trade or business in which you participate for more than 100 hours during 

the tax year. Thus, you could qualify under this test even if 

another individual who co-owns forest property with you 

participates in its operation more than you do during the tax 

year in question.

5. You and your spouse materially participated in the activity 

for any 5 of the preceding 10 tax years.

6. All the facts and circumstances of the situation indicate that 

you and your spouse participated in the activity on a regular, 

continuous, and substantial basis during the tax year.

The specific rules to be followed in applying this test have not 

been issued by the IRS as of September 30, 2012; however, the 

agency uses the following general principles as guides. The first 

is that your management of the timber activity is not taken into 

account if a paid manager participates in its management or if the 

management services that you perform are exceeded by those performed by any other individual. Second, if you do not participate 

in the timber activity for more than 100 hours during a tax year, 

you cannot satisfy the facts-and-circumstances test for the year.

Formal recordkeeping is not required to prove the number of 

hours devoted to operation of the timber activity. The taxpayer 

is allowed to document the number of hours by any reasonable 

means, including—but not limited to—appointment books, calendars, and narrative summaries.

Retired or Disabled Owners and Their Surviving Spouses. 

In some cases, owners who are retired or disabled, or the 

surviving spouses of such persons, may not be subject to the 

material participation tests. If the timber ownership qualifies 

as a farm business under IRC section 2032A (relating to estate 

tax special use valuation of farm and forest land), these persons need only satisfy an “active management” test. This test 

involves no specified number of hours, nor does it impose restrictions on participation by other persons. Rather, the taxpayer 

need only be involved in making major management decisions 

and not day-to-day operating decisions.

Reporting Expenses of a Sole Proprietorship. If timber operations are established as a sole proprietorship and are incidental 

to farming activities, deductible timber expenses are listed with 

deductible farming expenses on IRS Form 1040, Schedule F: 

Farm Income and Expenses. The form includes separate lines 

for tax and interest deductions. Timber operating expenses and 

carrying charges, for which there are no specific line entries, 
28 Forest Landowners’ Guide to the Federal Income Tax

should be itemized on the line for “other expenses.” All such 

deductions should be individually listed and carried over to an 

attachment, if necessary.

If timber operations are a separate sole proprietorship business or are incidental to a nonfarm business, timber deductions 

are reported on IRS Form 1040, Schedule C. Schedule C also 

includes separate lines for tax, interest, and certain specific deductions. Other timber-related deductions should be individually listed on the line for “other expenses” and carried over to 

an attachment if necessary.

Reporting Expenses of a Partnership or Corporation. If timber operations are established as a partnership, C corporation, 

Subchapter S corporation, LLC, or other type of business the 

appropriate business form, discussed in IRS Publication 334, 

should be used.

Timber Held as Part of a Trade or Business With No Material Participation

The second category is timber held as part of a trade or business in which the taxpayer does not materially participate in 

one of the ways discussed previously. Under the passive loss 

rules, this type of forest ownership is classified as a passive 

activity. C corporations (those subject to the corporate income 

tax) that are not classified as closely held or as personal service 

corporations currently can deduct operating expenses and carrying charges associated with passive timber ownership from 

income from any source without limitation. In general, deductions attributable to passively held forest properties, and to 

other passive activities, are allowed only to the extent of the 

taxpayer’s income from all passive activities during the tax 

year. An exception to this rule is that closely held C corporations (other than personal service corporations) are permitted 

to offset deductions from passive activities against income 

from active businesses (but not against portfolio income, which 

includes such items as dividends and interest). Credits attributable to passive timber ownership may be applied only to offset 

taxes associated with income from passive activities. Closely 

held C corporations are an exception to this rule, in that such 

credits also may be applied to offset taxes associated with income from active businesses.

In general, casualty loss deductions are not subject to the passive loss rules. Such deductions, discussed in chapter 7, may 

be taken currently against income from any source by passive 

taxpayers, as well as by those who are material participants.

If deductions from a passive timber ownership, including depreciation and amortization deductions, exceed passive income 

from all sources for the tax year, the excess may be carried forward (suspended) and used in future years when the taxpayer 

either realizes passive income or disposes of the entire timber 

ownership that gave rise to the passive loss. Credits not used 

during a particular tax year also may be carried forward, but 

not back, for use in future years, but may not be taken solely 

because the entire timber ownership interest is disposed of. In 

certain cases, an election may be made to increase the basis of 

property by the disallowed credit immediately before the transfer of the property.

For tax reporting, allowable passive deductions for the tax year 

are computed on IRS Form 8582: Passive Activity Loss Limitations. It is beyond the scope of this publication to describe in 

detail the use of this complex form. If your timber ownership 

is passive in nature, you may want to consult a professional tax 

advisor concerning the use of Form 8582.

Timber Held as an Investment

Timber held as an investment, rather than as part of a trade or 

business, is not subject to the passive loss rules. The distinction between a “trade or business” and an “investment” is not 

always an easy one to make. All the facts and circumstances 

relating to the activity have to be examined. In general, however, an investment is an undertaking entered into or engaged in 

with a view to realizing a profit, but which does not involve the 

same regularity or frequency of activity that a trade or business 

would require. Corporations in the investment category can 

fully deduct operating expenses and carrying charges against 

income from any source. As described next, however, the ability of noncorporate investors to deduct these expenditures is, in 

general, more limited.

Management Costs. Both corporate and noncorporate timber 

owners generally may deduct management costs relating to 

timber held as an investment against income from any source. 

Management costs—as used here—include all operating 

expenses and carrying charges except property taxes, other 

deductible taxes, and interest. For noncorporate taxpayers, 

however, management costs are classified as “miscellaneous 

itemized deductions.” This means that they can be deducted 

only to the extent that—when aggregated with all other miscellaneous itemized deductions—the total exceeds 2 percent of the 

taxpayer’s adjusted gross income. The proportion of such deductions that falls below the 2-percent floor is permanently lost. 

Other types of miscellaneous itemized deductions include, but 

are not limited to, costs of tax return preparation, safe-deposit 

box rental, financial journal subscriptions, and investment advice. Timber management costs in this category also may be 
Forest Landowners’ Guide to the Federal Income Tax 29

capitalized as carrying charges, as discussed previously, if the 

taxpayer prefers. The same expenditure cannot, however, be 

counted toward the 2-percent floor on miscellaneous itemized 

deductions and also capitalized.

Taxes. Property tax and other deductible taxes attributable to 

timber and forest land held for profit as an investment may be 

deducted in full each year against income from any source. 

Although they are itemized deductions for investors, taxes are 

not miscellaneous itemized deductions and therefore are not 

subject to the 2-percent floor for such deductions. If you prefer, 

you may elect to capitalize property taxes and recover them 

upon sale of the timber rather than deduct them in the year 

paid. Severance and yield taxes may not be capitalized or currently deducted—they must be offset against the timber income 

to which they are attributable.

Interest. Corporate taxpayers may deduct unlimited timber 

investment interest expense against income from any source, 

but only at the corporate level. Noncorporate timber investors 

may deduct interest expense from both timber and nontimber 

sources only to the extent of net investment income from all 

sources for the tax year. Excess investment interest that cannot 

be used in the current tax year because of this ceiling may be 

carried forward indefinitely for deduction in future years. Net 

investment income is investment income, less those expenses 

other than interest expense that are directly connected with production of the investment income, as discussed in IRS Publication 550, Investment Income and Expenses.

Investment income generally does not include capital gains

realized from selling investment property. You may, however, 

elect on IRS Form 4952: Investment Interest Expense Deduction to include all or a portion of a capital gain as investment 

income. Example 4.11 demonstrates the limitation on the deduction of investment interest.

As discussed earlier, a taxpayer may elect to capitalize all or 

part of the interest paid instead of deducting it or carrying it 

forward, and thus, use it to offset income realized from the disposal of timber in future years.

Reporting Expenses. Deductible investment expenses are listed on IRS Form 1040, Schedule A: Itemized Deductions, on the 

appropriate line for each type of deduction. For this reason, it 

is only possible to deduct these expenses if you itemize deductions for the year. If in any tax year you do not itemize deductions, or alternatively you do not elect to capitalize investment 

expenses, they are lost for tax purposes and you will not be able 

to recover them.

You incurred $3,000 of investment interest expense in 2011 but had 

only $2,000 of net investment income. You may not deduct the full 

$3,000 of interest paid. Rather, you may deduct only $2,000, the 

amount of net investment income. The remaining $1,000 may be carried forward indefinitely and be eligible for deduction in any later year 

in which net investment income—from any investment source—

is realized.

Example 4.11.— Deduction of Investment Interest Expense.
30 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 31

Chapter 5. Income Considerations

The focus of this chapter is the sale or other disposal of standing timber and the recovery of timber basis. Also discussed are 

sales of cut products, government cost-sharing payments, and 

the rules regarding the filing of Internal Revenue Service (IRS) 

Form T (Timber): Forest Activities Schedule and IRS Form 

1099—an information return.

Timber Sale Receipts

When you dispose of standing timber, or cut standing timber 

and dispose of the logs or other products, you must determine 

the type as well as the amount of gain or loss for Federal income tax purposes. The amount of gain or loss is determined 

by the price you receive, the costs of the sale, and your investment (basis) in the timber sold. The type of gain or loss 

depends on a number of factors, including how long you 

owned the timber, the purpose for which you own it, how you 

disposed of it, and what kind of timber-related activities you 

normally engage in.

Determining the Amount of Gain or Loss

Net gain or loss from the disposition of timber is generally determined in the same way as with most other assets. The total 

amount received is reduced by any expenses directly related to 

the disposal and by the adjusted basis of the timber disposed 

of. A special rule applies to certain timber cut by the owner, as 

explained under “IRC [Internal Revenue Code] Section 631(a) 

Cutting of Standing Timber With an Election to Treat as a 

Sale,” later in this chapter. When timber acquired as a single 

unit is disposed of in more than one transaction over a period 

of years, special procedures must be used to determine the deductible basis of the timber disposed of at any one time.

Costs of Sale. Timber selling expenses are those costs incurred 

by you that are directly related to the sale or other disposal of 

timber. They include, but are not limited to, the costs of finding 

a buyer, timber cruising, travel, marking, and scaling, as well 

as fees paid to consulting foresters, appraisers, selling agents, 

and attorneys. Such expenditures cannot be deducted from ordinary income not resulting from the sale; instead, they reduce 

the amount received for the purpose of computing gain or loss 

from the sale.

Adjusted Basis. As discussed in chapters 4 and 15, after you 

have established the original basis of your timber, you must 

adjust it as needed. You should make adjustments to reflect 

additional timber acquired, timber cut or sold since the last 

adjustment, timber losses claimed on your tax return, and reforestation costs that you are deducting under the provisions 

of IRC section 194 or have elected to capitalize (see chapter 4, 

“Reforestation Tax Incentives,” and chapter 15, “Timber Accounts”). You also should make adjustments to reflect transfers 

during the year from young-growth and plantation subaccounts

to merchantable timber subaccounts and for growth since the 

last adjustment. In addition, the number of units shown in a timber account should be adjusted to correct inaccuracies or reflect 

changes in your standards of utilization, and the units themselves should be updated if you change to a different log rule 

or other unit of measure. All such adjustments are made on IRS 

Form T (Timber), Part II. Adjustments to timber subaccounts 

are illustrated in Example 5.1 and discussed in detail in chapter 

15. Adjustments after a harvest are illustrated in Example 5.2.

For large forest ownerships, adjustments in the timber accounts 

may have to be made annually to keep the dollar amounts and 

volumes shown in the accounts current. If your forest acreage 

is small, however, and you only sell or cut timber infrequently, 

you probably need to make adjustments only at times of disposal. At the end of any year in which a disposition occurs, but 

before basis recovery is computed, each timber account should 

reflect how much merchantable timber in that account was 

available for cutting. This determination can easily be made by 

In 2010, you sold 1,000 cords of the merchantable timber on your 

150-acre tract. The sale price was $22,000, payable in full in cash on 

the effective date of the contract. You had not sold, cut, or otherwise 

disposed of any timber from the property in prior years. You contracted with a consulting forester to cruise, mark, and sell the timber. 

The consultant charged 10 percent of the gross sale proceeds, or 

$2,200 for her services.

You determined your deductible basis for the timber sold by multiplying the depletion unit by the number of units sold. The adjusted dollar 

basis of your timber account available for depletion as of the beginning of 2010 was $32,408. The adjusted volume at the beginning of 

2010, after adding the growth that occurred since the last adjustment, 

was 2,320 cords. The depletion unit thus was $13.97 per cord, obtained by dividing the adjusted basis by the adjusted volume ($32,408 

÷ 2,320 cords). The deductible basis for the sale was therefore 

$13,970, determined by multiplying the depletion unit by the number 

of cords sold ($13.97 per cord x 1,000 cords). The net gain from the 

sale was $5,830, determined by subtracting the deductible basis 

and the costs of sale from the sale proceeds ($22,000 – $13,970 – 

$2,200). You reported the allowable deductible basis of the timber 

sold on IRS Form T (Timber), Part II, as shown in fig. 5.1, and the gain 

from the sale on Form T (Timber), Part III, as shown in fig. 5.2.

Example 5.1.—Disposal of Standing Timber.
32 Forest Landowners’ Guide to the Federal Income Tax

re-estimating the total volume of merchantable timber present 

on the tract at the same time that the trees to be cut are marked 

or otherwise selected.

How To Recover Your Basis. After the adjusted basis is calculated, it is necessary to determine the depletion unit. This is 

done by dividing the adjusted basis shown in the timber account 

by the total volume of timber in the account. The depletion 

unit usually is expressed in dollars per unit of measure, such as 

thousand board feet (MBF), cubic feet, tons, or cords. The unit 

for Christmas trees or pole and piling operations, however, may 

be linear feet or the individual tree. A depletion unit should be 

determined for each merchantable timber subaccount. Although 

the depletion unit always is determined in the same way, how 

you use it to recover your basis in timber depends on whether 

you dispose of standing timber, or alternatively, cut it yourself 

and sell cut products.

Recovery of Basis—Disposal of Standing Timber. Standing 

timber may be disposed of by either a lump-sum sale or under a 

pay-as-cut contract. Both methods are discussed in detail in this 

chapter. Using either method, basis is recovered by subtracting 

the adjusted basis of the timber disposed of from the proceeds 

received. Example 5.1 illustrates use of the depletion unit to recover basis, and the determination of net gain from the disposal 

of standing timber.

Recovery of Basis—Cutting Standing Timber. Instead of 

selling standing timber that is then cut by the purchaser, you 

may cut your timber yourself or have someone cut it for you 

under a cutting services contract. Your adjusted basis may then 

be recovered by subtracting it from the proceeds received from 

the sale of the logs, or from the sale of products you produce 

from them. This type of recovery is termed timber depletion. 

Example 5.2 illustrates the recovery of basis when you cut your 

own timber.

You cannot claim a depletion allowance for timber cut for 

personal use, such as firewood for your home, and you do not 

adjust the cost basis in the account when you do this type of 

cutting. If you cut very much timber for personal use, however, 

you may need to adjust the account to reflect the decreased 

quantity that is available for commercial cutting or sale.

Determining the Type of Gain or Loss

Standing timber may be treated for income tax purposes as either 

a capital asset or a noncapital (ordinary) asset. This distinction is 

critical in determining whether a timber owner’s gain or loss is 

considered capital or ordinary in nature and in determining how 

timber gains and losses are reported.

Tax rates are subject to change, but as of September 30, 2012, 

noncorporate taxpayers are taxed at six levels for ordinary 

income, with a maximum rate of 35 percent. In contrast, noncorporate long-term capital gains generally are taxed at 15 percent (for 2008 through 2012, the rate is 0 percent for amounts 

which, when added to the taxpayer’s ordinary income, fit under 

the ceiling for the 15-percent bracket for ordinary income). Ordinary income and long-term capital gains are taxed at exactly 

the same rates for corporate taxpayers not electing to be taxed 

as a partnership (see chapter 12, “Subchapter S Corporations”). 

Tables 5.1 and 5.2 show the tax brackets and rates for noncorporate and corporate taxpayers for 2012.

You manage your timber as a sole proprietor. You cut 500 cords of timber 

from the 150-acre tract. The cutting was completed in 2011 at a cost 

of $7,520 for fuel and depreciation on equipment, or $15.04 per cord 

($7,520 ÷ 500 cords). You could sell only 300 cords, however, by the 

end of your 2011 tax year. You received $45 per cord for the wood sold. 

Your depletion unit for the timber cut was $12.89 per cord, determined 

as shown on IRS Form T (Timber), Part II (fig. 5.3), where the values are 

carried forward from Example 5.1 (fig. 5.1)

You would report the gain on the sale of the wood on IRS Form 1040, 

Schedule C or Schedule F, as appropriate, as follows:

2011 income on the sale of pulpwood:

 Proceeds from sales (300 cords x $45 per cord).....................$ 13,500

Less expenses

 Depletion allowance (300 cords x $12.89 per cord) ................ – 3,867

 Logging expenses (300 cords x $15.04 per cord)................... – 4,512

 Gain on pulpwood sales .........................................................$ 5,121

Example 5.2.—Recovery of Basis When Cutting Standing Timber.

If you had held the timber for more than 1 year, and elected and qualified 

under the provisions of IRC section 631(a), the gain would qualify for 

treatment as a long-term capital gain. Section 631(a) procedures are 

discussed under “IRC Section 631(a) Cutting of Standing Timber With an 

Election To Treat as a Sale,” later in this chapter.

You entered the wood not sold in 2011 into a wood inventory account, 

as follows:

Closing 2011—opening 2012 wood inventory account

 Volume (cords)........................................................................ 200

 Cost: Depletion allowance (200 cords x $12.89 per cord).......$ 2,578

 Plus logging expenses (200 cords x $15.04 per cord)............. + 3,008

 Total .......................................................................................$ 5,586

The $5,586 balance in the inventory account would be deducted from 

the revenue you received when you sold the wood in 2012.
Forest Landowners’ Guide to the Federal Income Tax 33

Figure 5.1.—IRS Form T (Timber), Part II: Timber Depletion.
34 Forest Landowners’ Guide to the Federal Income Tax

Figure 5.2.—IRS Form T (Timber), Part III: Profit or Loss From Land and Timber Sales.
Forest Landowners’ Guide to the Federal Income Tax 35

Figure 5.3.—IRS Form T (Timber), Part II: Timber Depletion.
36 Forest Landowners’ Guide to the Federal Income Tax

Capital Gain Status Is Important. In addition to the lower tax 

rates for noncorporate long-term capital gains, there are other 

important reasons for you to be certain that income from the 

sale or cutting of timber qualifies to the extent possible as a capital gain. For example, net capital losses may be used to offset 

only $3,000 of ordinary income per year, but there is no limit 

on using capital losses to offset capital gains. Thus, if you have 

large capital losses from any source, you may be able to deduct 

a greater portion of those losses during any year in which you 

have timber capital gains. Also, if you are a sole proprietor or 

partner whose timber holdings are considered to be a business 

(see chapter 3, “Purpose for Holding Timber”), you are subject 

to self-employment tax on ordinary income from the business. 

If your timber proceeds qualify for and are reported as either a 

long- or short-term capital gain, however, they are exempt from 

this tax. This is an important consideration, particularly for timber owners who are retired or semi-retired and have little or no 

income from wages or salary. See chapter 9 for a more detailed 

discussion of self-employment tax.

Capital Gains From Timber Transactions. Whether your timber gains and losses qualify for capital gains treatment depends 

on three factors:

1. Your primary purpose for holding the timber. Standing 

timber is a capital asset if it is neither used in a trade or business nor held primarily for sale to customers in the ordinary 

course of a trade or business. Gain on the outright (lumpsum) sale or exchange of such timber, if owned for the required holding period (more than 1 year, see item 3, “How 

long the timber has been held”), is a long-term capital gain 

reported on IRS Form 1040, Schedule D: Capital Gains and 

Losses. Although timber used in a trade or business is not a 

capital asset, its outright sale may, nevertheless, also result 

directly in a long-term capital gain under sections 631(b) and 

1231 of the Internal Revenue Code (IRC) if the holding period requirement has been met.

Taxable income ($)

Pay the amount in this column,

plus the indicated percent

of taxable income greater than 

the lower limit of the bracket ($)

Type of income

Ordinary income (%) Net capital gainsa (%)

Table 5.2.—How corporate taxpayers are taxed in 2012.

0–50,000 0 15 15

50,000–75,000 7,500 25 25

75,000–100,000 13,750 34 34

100,000–335,000 22,250 39 39

335,000–10,000,000 113,900 34 34

10,000,000–15,000,000 3,400,000 35 35

15,000,000–18,333,333 5,150,000 38 38

18,333,333 — 35 35

a

 Corporations must distinguish capital gains from ordinary income even though both types of income are taxed at the same rate.

Table 5.1.—How noncorporate taxpayers are taxed in 2012.

a

 Brackets are not shown for married taxpayers filing separate returns or heads of households.

b For capital gains received after December 31, 2007, and before January 1, 2013, the tax rate is 0 percent for amounts which, when added to the 

taxpayer’s ordinary income, fit under the ceiling for the 15-percent bracket for ordinary income.

Type of taxpayera Type of Income

Married filing

joint return and

surviving spouse

Single taxpayer Estates and

nongrantor trusts Ordinary income Net long-term

capital gains

Taxable income ($) Maximum marginal tax rate (%)

0–17,400 0–8,700 — 10 0b

17,400–70,700 8,700–35,350 0–2,400 15 0b

70,700–142,700 35,350–85,650 2,400–5,600 25 15

142,700–217,450 85,650–178,650 5,600–8,500 28 15

217,450–388,350 178,650–388,350 8,500–11,650 33 15

More than 388,350 More than 388,350 More than 11,650 35 15
Forest Landowners’ Guide to the Federal Income Tax 37

2. How the timber is disposed of. You may dispose of your 

timber in one of three ways: (1) by lump-sum sale or exchange; (2) under a pay-as-cut contract where you retain 

an economic interest; or (3) by cutting the timber yourself, 

converting it to salable products such as sawlogs, pulpwood, 

or lumber, and making a specific election under IRC section 

631(a). If your timber is held primarily for sale to customers

in the ordinary course of business, the net gain can qualify 

for treatment as a long-term capital gain under IRC section 

631(b) with either a lump-sum or pay-as-cut contract if the 

holding period requirement has been met. The complexity 

of the tax treatment of revenue and expenditures associated 

with timber leases or long-term cutting contracts is beyond 

the scope of this publication. For information on that subject, consult the summaries of Revenue Rulings (Rev. Rul.) 

62-81, 62-82, 75-59, and 78-267 in appendix A.

3. How long the timber has been held. To qualify for long-term 

capital gain treatment, timber that you own as a capital asset 

and sell lump-sum must have been held more than 1 year 

before its sale. Timber you dispose of under IRC section 

631(a) must have been held more than 1 year before cutting. 

Timber you dispose of under IRC section 631(b) must have 

been held more than 1 year before its sale if sold lump-sum, 

or more than 1 year before the date the timber is considered 

cut if sold using a pay-as-cut contract, as discussed under 

“IRC Section 631(b) Disposal of Standing Timber With 

an Economic Interest Retained or Lump Sum,” later in this 

chapter. For the sale or disposal of timber acquired by gift, 

both the donor’s and recipient’s time of ownership may be 

counted toward the holding period; thus, the holding requirement with respect to the recipient may be entirely met before 

the gift is even made. For inherited timber, no holding period is required to qualify for long-term capital gain status.

“More than 1 year” means that the disposal can occur no sooner 

than the day after the date that is 1 calendar year after the date 

you took title to the timber. For example, if you purchased forest land on March 3, 2011, long-term treatment would apply if 

you sold timber from the land on or after March 4, 2012.

Sale of Standing Timber for a Lump Sum

A sale for a lump sum is the outright sale, usually by means of 

a timber deed or sale contract, of standing timber for a fixed 

total amount agreed upon in advance. The sale may cover all 

timber on a specified tract or only certain species, diameter 

classes, or individually marked trees on the tract.

Capital gain treatment will apply if the timber is a capital or 

business asset (including timber held primarily for sale to customers in the ordinary course of a trade or business) in the hands 

of the seller. The sale or disposal is reported differently in these 

two cases; thus, it is necessary to distinguish between when your 

timber is a capital asset and when it is a business asset.

Timber is a capital asset in your hands if it is not held primarily 

for sale to customers in the ordinary course of a trade or business and is not property used in a trade or business. This means 

that timber is a capital asset if you are holding it primarily for 

personal use or as an investment (see chapter 3, “Types of Forest Ownership and Operation”). Whether timber is held primarily for sale to customers in the ordinary course of a trade or 

business is not always easy to determine. There is no generally 

applicable definition of “trade or business” in the IRC or in the 

Income Tax Regulations. Likewise, there is no broadly applicable judicial definition of the term. Therefore, the question can 

be answered only by weighing all the facts and circumstances 

of a particular situation. Although no single factor is determinative, the following factors are important:

1. The purpose for acquiring and holding the timber, whether 

for sale or investment.

2. The number, continuity, and frequency of timber sales, as 

opposed to isolated transactions.

3. The extent to which you solicit or promote timber sales, as 

opposed to merely letting prospective purchasers approach you.

4. Any facts that indicate that timber transactions are part 

of your occupation or contribute substantially to your 

livelihood. In general, if you only make an occasional timber 

sale that is unrelated to any trade or business in which you 

are engaged, the timber will qualify as a capital asset.

If you intend to sell standing timber and are in doubt about 

whether it is a capital asset, you should consider reporting it 

as an IRC section 631(b) disposal under a lump-sum contract, 

or entering into a contract for disposal with an “economic interest retained,” discussed in the following section. As noted 

previously, timber you dispose of lump-sum under IRC section 

631(b) must have been held more than 1 year to qualify for 

capital gain treatment.

Capital gains and losses are reported differently than ordinary 

income on your tax return. The rules are discussed in IRS Publication 544, Sales and Other Dispositions of Assets. To report 

long-term and short-term lump-sum sales of standing timber 

held as a capital asset, use IRS Form 8949 and IRS Form 1040, 

Schedule D. If the long-term gain holding period has been 
38 Forest Landowners’ Guide to the Federal Income Tax

Lump-Sum Sales. Lump-sum sales of standing timber held 

primarily for sale to customers in the ordinary course of a trade 

or business qualify under IRC section 631(b), if all the requirements other than retention of an economic interest are met. Your 

gain or loss from a section 631(b) lump-sum sale is determined 

in exactly the same way as for lump-sum sales in general, as 

discussed previously. In this case, however, it is reported as an 

IRC section 1231 transaction on IRS Form 4797, also as discussed previously.

Holding period. To qualify for long-term capital gain treatment, 

timber sold lump-sum under IRC section 631(b) must have 

been held more than 1 year before its sale, as discussed previously. The date the timber is considered to be cut may not be 

used as the date of disposal. Likewise, the election to treat the 

date of an advance payment as the date of the disposal of the 

timber does not apply.

Disposal With an Economic Interest Retained. Timber cut 

under a contract that requires payment at a specified rate for 

each unit of timber actually cut and measured, rather than 

as a lump-sum amount of money agreed on in advance, is a 

disposal with an economic interest retained rather than an outright sale of timber. This type of transaction often is called a 

pay-as-cut contract; it obligates the purchaser to cut the designated trees and purchase them at the unit price specified in the 

contract. As noted in chapter 13, “Integrated Example of Tax 

Research,”selling timber on the shares with a logger also may 

result in an IRC section 631(b) disposal with an economic interest retained.

You own an economic interest in standing timber if you acquire 

by investment an interest in the timber and must look to income 

derived from its cutting for a return on your investment. In a 

disposal with economic interest retained, the seller usually retains legal title to the trees until they are cut and thus bears the 

risk of any damage to or loss of the standing timber until cut. 

Advance payments are permitted under an IRC section 631(b) 

pay-as-cut contract. In such a case, however, the contract must 

clearly stipulate that, upon completion of the cutting, adjustments are to be made, as required, so that the total amount paid 

is determined by the volume of timber actually cut, multiplied 

by the specified unit price.

Scaling the cut timber is the usual but not the only acceptable 

method of measurement. The volume also can be determined by 

cruising the standing timber subject to the contract. The amount 

actually disposed of is then the cruised volume before cutting, 

minus the cruised volume of contract timber that was not cut 

(see the summary of Rev. Rul. 78-104, appendix A).

met, the timber transaction is entered in Part II of each form 

(long-term capital gains and losses). If the holding period has 

not been met, the information is entered in Part I of each form 

(short-term capital gains and losses). Use of the forms is demonstrated in Example 5.3.

If your sale involves payments extending beyond the year of 

sale, see the discussion of installment sales in chapter 9.

Gains and losses from lump-sum sales of standing timber that 

do not qualify for capital gain treatment are ordinary gains 

and losses. If you are a sole proprietor, such gains and losses 

must be reported on a business schedule, either Schedule C or 

Schedule F of IRS Form 1040. Other forms are used by partnerships, corporations, trusts, and estates. Include an attachment on a plain sheet of paper giving the details of the sale and 

showing the calculation of the deductible basis, if any. Alternatively, IRS Form T (Timber), Parts II and III can be used to 

report this information.

IRC Section 631(b) Disposal of Standing 

Timber With an Economic Interest 

Retained or Lump Sum

IRC section 631(b) provides capital gain treatment for timber 

that is held for use in a trade or business or held primarily for 

sale to customers in the ordinary course of a trade or business. 

This section qualifies covered transactions for treatment under 

IRC section 1231, reported on IRS Form 4797. If the holding 

period requirement is met, both lump-sum sales and disposals 

with an economic interest retained can qualify under section 

631(b).

You sold 50 thousand board feet standing timber in a lump-sum 

sale on August 15, 2011. The contract price was $15,000. The 

timber was located on land purchased on March 1, 1981, as part 

of a farm. Your adjusted basis in the timber sold was $2,413, 

computed according to the procedures discussed in the section 

“Determining the Amount of Gain or Loss,” previously, and as 

illustrated in chapter 15. A State service forester marked and 

tallied the trees sold and estimated the volume. This service was 

provided free of charge. You paid $325 in legal fees, however, 

to have the contract checked and to close the sale. You are engaged primarily in crop and livestock production on the farm and 

sell timber infrequently. Given these facts, the timber should be 

considered to be a capital asset in your hands, and the proceeds 

reported on IRS Form 8949 and IRS Form 1040, Schedule D. 

The sale resulted in a long-term capital gain of $12,262 ($15,000 

sale proceeds – $325 sale expenses – $2,413 allowable basis). 

The transaction should be reported on Part II of Form 8949 as 

shown in fig. 5.4, and Part II of Form 1040, Schedule D as shown 

in fig. 5.5.

Example 5.3.—Outright Sale of Standing Timber. 
Forest Landowners’ Guide to the Federal Income Tax 39

Figure 5.4.—IRS Form 8949: Sales and Other Dispositions of Capital Assets.
40 Forest Landowners’ Guide to the Federal Income Tax

Figure 5.5.—IRS Form 1040, Schedule D: Capital Gains and Losses.
Forest Landowners’ Guide to the Federal Income Tax 41

Timber reported under IRC section 631(b) is IRC section 1231 

property, which means that you are entitled to capital gain 

treatment when aggregate section 1231 gains exceed aggregate 

losses from the disposition of such property. Section 1231 gains 

and losses are reported on IRS Form 4797 and totaled. If a net 

gain results, it is treated as a net long-term capital gain and 

transferred to Part II of IRS Form 1040, Schedule D, where it 

is combined with any other long-term gains and losses for the 

year. If a net loss results, however, it is treated as an ordinary 

loss. This means that it is fully deductible from ordinary income in the current year. The net loss is transferred to Form 

4797, Part II, where it is combined with any other ordinary 

gains and losses for the year (see IRS Publication 544, Sales 

and Other Dispositions of Assets).

Three provisions of IRC section 631(b) are discussed in more 

detail: owner, definition of timber, and holding period.

Owner. The term owner for purposes of qualifying under IRC 

section 631(b) is broadly defined to include any person or legal 

entity—including sublessors and holders of contracts to cut 

timber—with an interest in the timber. An interest means that 

you have the right (before entering into the section 631(b) contract), if you so choose, to cut the timber in question for sale on 

your own account or for use in your trade or business.

Timber. Timber for IRC section 631(b) purposes includes the 

parts of standing trees usable for lumber, pulpwood, veneer, 

poles, piling, crossties, and other wood products. Also included 

are evergreen trees that are more than 6 years old when severed 

from their roots and that are sold for ornamental purposes, such 

as Christmas trees, discussed in chapter 10. Section 631(b) does 

not apply to evergreen trees sold in a live state, such as balled 

and burlapped Christmas trees, whether or not for ornamental 

purposes. Tops and other parts of standing trees utilized separately from the main stem are not considered as either evergreen trees or timber for purposes of section 631(b). They may 

however, be considered as timber if utilized as part of the tree 

as a whole in the manufacturing process. The term evergreen

is used in the commonly accepted sense and includes pine, 

spruce, fir, hemlock, cedar, and other coniferous trees.

Holding period. The date of disposal under a pay-as-cut contract is the date the timber is considered to be cut. Because it 

is not usually practical to measure timber in the woods as the 

trees are severed, timber is considered cut when, in the ordinary 

course of business, the quantity of timber cut is first definitely

determined. Therefore, for this purpose, the date of disposal 

is the date on which the volume of the cut timber is first measured—at a log landing, woodyard, or mill—or after a followup timber cruise.

This definition of cut could help in determining whether a payas-cut disposal of timber under IRC section 631(b) qualifies for 

long-term capital gain status. You may not have owned the timber for the required period at the time it was severed, but by the 

time it is measured, the holding period may be met. The time of 

measurement cannot, however, be purposely delayed merely to 

obtain a tax advantage.

Alternatively, if you receive payment for timber under a 

pay-as-cut contract before the timber is cut you may elect to 

treat the date of the payment as the date of disposal of the timber. 

The election to treat the date of an advance payment as the date 

of disposal of the timber is effective only for the purpose of determining whether the holding period is satisfied. It does not affect when you report gain or loss from a disposal of timber with 

a retained interest.

If you include an advance payment on your tax return as a 

capital gain from the disposal of timber, and the cutting right 

expires or is terminated or abandoned before all the timber paid 

for is cut, you must file an amended return. The amount that 

equals the contract price of the timber actually cut remains a 

capital gain, but any additional amount attributable to the uncut 

timber is ordinary income to the extent it is not returned to the 

holder of the contract.

Your gain or loss from an IRC section 631(b) timber disposal 

is determined in exactly the same way as for a lump-sum 

sale, as discussed previously in this chapter. It is reported as 

an IRC section 1231 transaction on IRS Form 4797, as discussed previously.

IRC Section 631(a) Cutting of Standing 

Timber With an Election To Treat as a Sale

When standing timber is cut by the owner and the logs or products manufactured from them are sold, all the proceeds must 

be reported as ordinary income unless an IRC section 631(a) 

election is in effect. If you have a section 631(a) election in effect, however, you may cut timber for sale or use in your trade 

or business and receive long-term capital gain treatment from 

holding it—exactly as if you had sold the standing timber outright instead of converting it yourself. In this case, the proceeds 

must be divided into two segments: (1) the gain that resulted 

from holding the standing timber until the year cut and (2) the 

value added by converting the standing timber into products. 

Any profit realized from converting standing timber into products always is ordinary income, not a capital gain. If you elect 

to use section 631(a), and the section 631(a) holding period has 

been met, the transaction is reported in two parts as follows:
42 Forest Landowners’ Guide to the Federal Income Tax

1. Report as an IRC section 631(a) gain or loss the difference 

between the adjusted basis for depletion of the timber that 

was cut and its fair market value (FMV) as standing timber 

on the first day of the tax year in which it was severed. An 

IRC section 631(a) gain or loss is treated as an IRC section 

1231 gain or loss that is netted with other section 1231 gains 

and losses you may have, and any net gain is treated as a 

long-term capital gain.

2. Report as ordinary income or loss the net income resulting 

from conversion of the standing timber into products, such 

as sawlogs or pulpwood. The profit or loss is determined in 

exactly the same manner as for any other business operation. 

The income received from the sale of the products is reduced 

by the cost of the timber, plus the cost of converting it. The 

cost of the timber processed is the FMV described previously 

in part 1.

Six aspects of IRC section 631(a) will be discussed in more detail: the meaning of owner, timber, timber use, holding period, 

and FMV, and how the election to use section 631(a) is made.

Owner. An owner for IRC section 631(a) purposes is essentially 

the same as for IRC section 631(b). For purposes of section 

631(a), an owner is any taxpayer who has owned or held a contract right to cut timber for the required holding period. To have 

a contract right to cut timber, you must have the unrestricted 

right to sell the timber cut under the contract or use it in your 

trade or business (see the summary of Rev. Rul. 58-295, appendix A). This means that if you were, for example, a logger who 

bought timber under a cutting contract, you would be the owner 

of that timber for section 631(a) purposes exactly as if you had 

outright title to it, or to the land and timber together.

If, however, you have only a contract to cut timber and must 

deliver the logs back to the owner or to a buyer specified by the 

owner, you are merely performing a logging service and do not 

qualify as an owner or holder of a contract right to cut timber. 

A logging service contract that uses the terms “buy” or “sell” 

or “stumpage charge” will not meet the requirement to have a 

contract right to cut to be considered an owner of the timber.

Timber. Timber for the purposes of IRC section 631(a) is defined exactly the same as for IRC section 631(b).

Business use. To qualify under IRC section 631(a), the trees 

must be cut for sale or for use in your trade or business, not 

for personal use. This includes timber cut and sold as rough 

products (logs, pulpwood, or fuelwood, for example) or cut and 

used in a conversion business such as sawmilling. “Timber cut 

by taxpayer” includes trees severed by other persons at your 

direction, as well as trees you personally cut.

Holding period. The holding period under IRC section 631(a) 

runs from the date you acquired the timber, or acquired the 

contract right to cut it, to the date it is considered to be cut. 

As explained previously, timber is considered cut when, in 

the ordinary course of business, the quantity cut is first definitely determined. The procedure used to make this determination will vary depending on where in the country the timber 

is located. Some areas use roadside scaling stations, while in 

others, logs are scaled or weighed by the mill that buys them, 

or at the landing by the logger or the hauler. You cannot deviate from the standard practice in the area simply to obtain a 

tax advantage.

Fair market value. The FMV value used as the sales price is 

that price at which the standing timber that was cut would have 

changed hands in a transaction between a buyer and a seller on 

the first day of the tax year—January 1 if you are a calendaryear taxpayer—in which the trees were cut, assuming that both 

parties had reasonable knowledge of all the necessary facts and 

neither was required to buy or sell. The trees must be valued as 

they existed on the first day of the tax year, regardless of any 

changes that occurred to them between that date and the date of 

they actually are cut.

The best indicators of FMV are the actual prices paid for similar 

timber in the area in which the timber being valued was located. 

Such prices, however, must be adjusted to account for any differences between the condition of the trees being valued and the 

markets for them, as compared with the timber for which actual 

prices are known. The FMV used must be for the actual trees 

cut; they must be valued on their own merits and not on the basis of a general average for the region. Among the factors to be 

considered are:

1. The character and quality of the timber as determined by 

species, age, size, and condition.

2. The quantity of timber per acre, the total volume under 

consideration, and its location with respect to available 

markets.

3. The accessibility of the timber from the standpoint of the 

probable cost of cutting and transportation.

4. The competition likely to develop from other timber buyers.

If you cut only a relatively small amount of timber during the 

year, you may be able to estimate its value by obtaining price 

information from mill operators and timber buyers in your area. 

If you cut a large amount, however, you probably should obtain 

an appraisal by a qualified timber appraiser, such as a consulting forester.
Forest Landowners’ Guide to the Federal Income Tax 43

Election. You elect to use IRC section 631(a) simply by computing your taxes according to the provisions of IRC sections 

631(a) and 1231. You indicate the election by checking a “Yes” 

box on line 18a of IRS Form T (Timber), Part II. The election 

must be made on an original tax return, including extensions, 

for the year to which it applies; it cannot be made on an amended return. The instructions for Form T (Timber), Part II, explain 

the records that are necessary if you make an election under 

section 631(a) in the current year, or have such an election in 

effect from a previous year.

An election under IRC section 631(a) is binding with respect to 

all eligible timber you cut in the year of the election and in all 

subsequent years. In general, you may revoke a section 631(a) 

election only by permission from the Commissioner of Internal 

Revenue (Commissioner). Such permission may be given only 

where there is a showing of undue hardship, and if given, you 

also must obtain permission from the Commissioner to make 

a new section 631(a) election. The 1986 Tax Reform Act (P.L. 

99-514), however, contained a special rule that permits timber 

owners who had a section 631(a) election in effect before January 1, 1987, to revoke it one time—and reelect it one time—

without permission from the Commissioner. The American Jobs 

Creation Act of 2004 (P.L. 108–357) contained a similar special 

rule for taxpayers who had a section 631(a) in effect before 

October 23, 2004. Qualifying taxpayers may revoke the section 

631(a) election effective for tax years after October 22, 2004, 

by checking a “Yes” box on line 18b of Part II of the form. In 

this case, the previous election and the revocation are disregarded for the purpose of making a subsequent 631(a) election. 

Both of these special rules chiefly benefitted forest industry 

firms, but may also help family forest owners who would benefit because of their particular tax situation.

Reporting requirements under IRC section 631(a) are the same 

as for IRC section 1231 gains and losses in general and for any 

other income realized from a trade or business. The gain or loss 

on the standing timber is reported on IRS Form 4797 with other 

section 1231 transactions for the year, as discussed previously 

for an IRC section 632(b) disposal. Sole proprietors report 

the profit or loss from the sale of the cut products on a business schedule—Schedule C or Schedule F of IRS Form 1040, 

as appropriate. Partnerships, corporations, trusts, and estates 

use other forms. The cost of the timber cut, the FMV used for 

computing gain or loss, and the expenses of cutting and sale are 

listed as “other” expenses on Form 1040, Schedule C or F.

A statement giving the details of the cutting and sale should be 

included with your tax return. In addition, attach IRS Form T 

(Timber), Part II. Your records must include details of how you 

determined the depletion basis that was used, if any. Also, include the information that was used to estimate the FMV.

Example 5.4 illustrates how to determine the two parts of the 

gain realized under an IRC section 631(a) election.

Government Program Payments

In general, taxpayers who receive a cost-sharing payment from 

a Federal or State government program must report the payment as part of their gross income. Under the provisions of IRC 

section 126, however, forest owners and other landowners can 

choose to exclude from their gross income part or all of costsharing payments from government conservation, reclamation, 

or restoration programs that meet three requirements:

You file your tax return on a calendar year basis, and you cut 40 MBF of 

timber during 2010 from a tract purchased in 2004. The sawlogs were 

piled at the roadside and sold, also in 2010. You received $18,000 for the 

logs. The FMV of the standing timber that was cut was $390 per MBF, or 

$15,600, as of January 1, 2010. Your basis in the timber cut (determined 

as explained in “Determining the Amount of the Gain or Loss,” previously) 

was $2,460. Your logging and skidding costs totaled $1,800. Because 

you had owned the timber that was cut for more than 1 year, you elected 

to report the cutting under IRC section 631(a). You determined the gain 

or loss on the cutting of the timber separately from the net income from 

the sale of the sawlogs, as follows:

Gain from cutting:

FMV as of January 1, 2010, of timber cut during 2010 ...........$ 15,600

Less: Allowable basis.............................................................. – 2,460

IRC section 1231 gain ............................................................$ 13,140

Example 5.4.—Election To Treat Cutting as a Sale.

Gain from sale of sawlogs at roadside:

Proceeds from sale of sawlogs ...............................................$ 18,000

Less cost of logs sold

FMV as of January 1, 2010, of timber cut and sold during 

2010 (depletion allowance) ..................................................... – 15,600

Logging costs......................................................................... – 1,800

Ordinary income .....................................................................$ 600

You had a $13,140 gain to report with any other IRC section 1231 gains 

or losses on IRS Form 4797, Part I (fig. 5.6). You also had income of 

$18,000 and expenses of $17,400 to report on Schedule C or Schedule F 

of IRS Form 1040 (fig. 5.7). How to report section 1231 gains and losses 

on Form 4797 was discussed previously.
44 Forest Landowners’ Guide to the Federal Income Tax

1. The Secretary of Agriculture has determined that the 

payment is primarily for the purpose of conserving soil and 

water resources, protecting or restoring the environment, 

improving forests, or providing a habitat for wildlife.

2. The Secretary of the Treasury or the Secretary’s designee 

has determined that the payment does not substantially 

increase the annual income from the property for which it is 

made. The Secretary has developed a procedure, described 

under “Determining the Excludable Amount” later in this 

section, to enable payment recipients to determine whether 

a cost-sharing payment substantially increases the annual 

income from a property.

3. The payment was for a capital expense; that is, it was not for 

an expense that may be deducted in the year it was incurred 

(see chapter 4, “Currently Deductible Costs: Operating 

Expenses and Carrying Charges”).

This provision has been available since 1979.

Qualifying Payments

Table 5.3 lists Federal and State conservation cost-sharing 

programs currently (2012) available to forest landowners who 

meet the previously listed requirements for exclusion from gross 

income. Several Federal programs listed in previous versions 

of this guide—including the Agricultural Conservation Program (ACP), Forestry Incentives Program (FIP), Stewardship 

Incentives Program (SIP), Forest Land Enhancement Program 

(FLEP), and Conservation Security Program (CSP)—have been 

discontinued or combined with other programs, and are no longer 

available. The number of State cost-sharing programs for forest landowners has increased in recent years, and new programs 

periodically are added to the list. If you participate in a program 

that is not listed in the table, you can check with the Natural Resources Conservation Service (NRCS) or Farm Service Administration (FSA) office at your local U.S. Department of Agriculture 

(USDA) Service Center, or your Cooperative Extension or State 

forestry agency office, to find out whether it meets the requirements for exclusion.

All the Federal programs listed in table 5.3 have been held 

to qualify as “small watershed programs” under IRC section 

126(a)(9), so that all cost-sharing payments you receive under 

them—up to the excludable amount, discussed in the following 

section—qualify for exclusion from gross income (see appendix 

A, “Cost-Sharing Payments”). Cost-sharing payments under the 

USDA Conservation Reserve Program (CRP) were not approved 

for exclusion until 2003 (see the summary of Rev. Rul. 2003-59, 

appendix A); until that time, landowners had to include costsharing payments received under CRP in their gross income.

Program Qualification published in Federal Register

Federal programs

Environmental Quality Incentives Program (EQIP) Dec. 29, 1997

Wetlands Reserve Program (WRP) Dec. 29, 1997

Wildlife Habitat Incentives Program (WHIP) Dec. 29, 1997

Conservation Reserve Program (CRP) Jun. 16, 2003

Longleaf Pine Initiative (LPI)a

State Acres for Wildlife Enhancement (SAFE)a

Forest Health Protection Program (FHPP) [Rev. Rul. 2009-23]

Southern Pine Beetle Prevention Program (SPBP)b

Western Bark Beetle Initiative (WBBI)b

State programs

North Carolina Forestry Development Program Oct. 3, 1984

Virginia Reforestation of Timberlands Program Oct. 3, 1984

Mississippi Forest Resource Development Program Apr. 18, 1985

California Forest Improvement Program Apr. 18, 1985

South Carolina Forest Renewal Program Nov. 5, 1985

Louisiana Forest Productivity Program Dec. 29, 1999

Wisconsin Forest Landowner Grant Program Jun. 4, 2003

Texas Oak Wilt Suppression Program Jun. 4, 2003

a

 The LPI and SAFE programs were initiated in recent years as Conservation Practices 36 and 38, respectively, of CRP. As with CRP payments in general, 

only LPI and SAFE cost-sharing payments meet the requirements for exclusion from gross income; signing or practice incentive payments, annual rental 

payments, and payments based on the conservation benefit of a practice rather than its cost must be included in gross income.

b The SPBP and WBBI programs were initiated in recent years under FHPP. Cost-sharing payments from these programs meet the requirements for 

exclusion from gross income.

Table 5.3.—Federal and State conservation cost-sharing programs commonly used by forest landowners that meet the requirements 

for exclusion from gross income.
Forest Landowners’ Guide to the Federal Income Tax 45

Figure 5.6.—IRS Form 4797: Sales of Business Property.
46 Forest Landowners’ Guide to the Federal Income Tax

Figure 5.7.—IRS Form 1040, Schedule C: Profit or Loss From Business.
Forest Landowners’ Guide to the Federal Income Tax 47

The regulations for IRC section 126 specify that government 

payments that are in the nature of rent or compensation for 

services cannot qualify for exclusion. Some payments made 

under two of the Federal programs listed in table 5.3, CRP and 

the Conservation Security Program (CSP), are of these types. 

The IRS has specifically held that rental payments and incentive payments under CRP, payments under the “enhancement 

component” of CSP that are based on an activity’s expected 

conservation benefit rather than its cost, and payments under 

the “stewardship” component of CRP are not cost-sharing payments and are not eligible for exclusion.

Some of the State programs listed in table 5.3 provide costsharing payments for the establishment and management of 

trees for timber. If you receive cost-sharing payments under 

such a program you should be aware that, in general, only payments made to assist in establishing or reestablishing trees can 

qualify for exclusion from gross income. Payments for timber 

stand improvement practices or other intermediate treatments 

must be included in your gross income. Remember, however, 

that if you are engaged in timber growing for profit you can 

deduct such expenses in the year they occur, as discussed in 

chapter 4, “Currently Deductible Costs: Operating Expenses 

and Carrying Charges.”

You have two options for reporting a cost-sharing payment that 

qualifies for exclusion from gross income for Federal income 

tax purposes:

1. You can exclude part or all of the payment from gross 

income.

2. You can include the payment in your gross income, even if 

part or all of it qualifies for exclusion. In some cases, including 

a payment in your gross income may provide a tax benefit.

The exclusion is available to the individual or legal entity that 

receives the cost-sharing payment, whether they own the affected property or lease it. You should be aware, however, that 

under IRC section 126(a)(10) cost-sharing payments from a 

State program only qualify for exclusion if they are made to an 

individual. This means that State program payments made to a 

corporation or partnership, for example, may not be excluded 

from income.

Determining the Excludable Amount

Under the regulations for IRC section 126, the maximum amount 

of a cost-sharing payment that can be excluded from gross income is, “the present FMV of the right to receive annual income 

from the affected acreage of the greater of 10 percent of the 

prior average annual income from the affected acreage or $2.50, 

times the number of affected acres.” This is the procedure developed by the Secretary of the Treasury to determine whether a 

cost-sharing payment substantially increases the annual income 

derived from a property. “Prior average annual income” is defined as the average of the gross receipts from the affected acres 

for the 3 tax years preceding the year in which you commence a 

practice for which you receive cost-share assistance.

The IRC section 126 regulations do not spell out how to calculate the “present FMV of the right to receive annual income.” 

A common method of determining the present value of a perpetual stream of annual payments, however, is to divide the 

amount of the payment by an appropriate rate of interest. The 

regulations also are silent as to what is an appropriate rate of 

interest, but the IRC specifies a procedure for special use valuation of farm and forest land for estate tax purposes in which 

the annual income from the property is divided by the Federal 

Land Bank, (now the Farm Credit System) interest rate (IRC 

section 2032A(e)(7)(A)). Although this procedure does not apply to section 126, the IRS has informally accepted it.2

You can determine the excludable amount of a qualifying costsharing payment by using a 4-step procedure:

1. Calculate 10 percent of the average annual income from the 

affected acres during the past 3 years.

2. Multiply $2.50 by the number of affected acres.

3. Calculate the present value of the larger number from steps 1 

and 2.

4. Compare the number from step 3 with your cost-sharing 

payment; the smaller of the two is the amount you can 

exclude from your gross income.

Examples 5.5 and 5.6 illustrate calculation of the excludable 

amount of a cost-sharing payment, with and without substantial 

income from the affected acres during the 3 tax years prior to 

the year you commence a cost-share practice. As shown in Example 5.6, the interest rate used strongly influences the excludable amount calculation in the third step of the procedure: the 

lower the interest rate, the higher the excludable amount. You 

might benefit from using an interest rate lower than the Farm 

Credit System Bank rate, particularly if your forest holding did 

not provide substantial income in the past 3 years. You should 

recognize, however, that this approach might be considered a 

somewhat aggressive tax posture and use an interest rate you 

can easily justify.

2

 The rates for each Farm Credit System region are published annually in June as an IRS Revenue Ruling. The current rates can be found in the Revenue Ruling section of the 

National Timber Tax Web site, http://www.timbertax.org, or on the IRS Web site, http://www.irs.gov. 
48 Forest Landowners’ Guide to the Federal Income Tax

you must still report it. Attach a plain sheet of paper to your tax 

return that specifies the amount of the cost-sharing payment, 

the date you received it, the amount of the payment that qualifies for exclusion from your gross income, how you determined 

that amount, and the amount you choose to exclude.

Determining Income Realized

If you receive a cost-sharing payment from a qualifying government program to make an improvement that increases the 

value of your land, you must determine and report the income 

realized from the increase in value. This determination is required under the regulations for IRC section 126 whenever 

an improvement paid for in part or all using a cost-sharing 

payment from a qualifying program increases the value of the 

land, even if the payment itself is entirely excludable from your 

gross income. It seems reasonable, however, that a farm or 

ranch owner who uses a cost-sharing payment from a qualifying conservation program to help pay the cost of installing a 

capital asset on his or her property is more likely to realize an 

increase in the value of the land than a forest owner who uses a 

cost-sharing payment from a qualifying small watershed or forest management program to defray the cost of a capital investment in resource management.

“Income realized” is defined as the value of the improvement 

paid in part or all by the cost-sharing payment, minus the sum 

of the excludable portion of the payment and your share of the 

cost of the improvement. The “value of the improvement” is 

defined as the FMV of the improvement multiplied by a fraction, the denominator of which is the total cost of the improvement, and the numerator of which is the total cost of the improvement, minus the sum of any payments from a government 

program not approved for exclusion from gross income, any 

part of a payment from a government program approved for 

exclusion that is not certified as primarily for conservation (see 

“Qualifying Payments,” earlier in this section), and any government payments made to you for rent or for your services.

See IRS Publication 225, Farmer’s Tax Guide, for further 

explanation and examples of calculating income realized. Determination of the FMV of a land improvement is beyond the 

scope of both this guide and IRS Publication 225. You may 

want to consult your tax advisor for assistance.

3

 The Farm Credit System Bank interest rates vary from district to district. The 2011 average rate for the Texas District, which serves Alabama, Louisiana, Mississippi, and Texas, 

is used here for illustrative purposes; see Rev. Rul. 2011-17, IRB 2011-33.

4

 The long-term annual Applicable Federal Rate for December 2011 is used for illustrative purposes; see Rev. Rul. 2011-31, IRB 2011-49. 

In 2011, you the sold the timber on 40 acres of a property you own 

in Louisiana and received $84,500. This was your only income from 

the property for many years. This year, you reestablished trees on the 

40 acres at a total cost of $6,000 and received a $3,000 cost-sharing 

payment from the Louisiana Forest Productivity Program. Using the 

Farm Credit System interest rate, how much of the payment can you 

exclude from your Federal gross income?

Step 1: 0.10 x ($84,500 ÷ 3) = $2,817

Step 2: $2.50 x 40 = $100

Step 3: $2,817 from step 1 is the larger number; $2,817 ÷ 0.06043

= $46,634

Step 4: $46,634 is much larger than $3,000; you can exclude the 

entire cost-sharing payment from your gross income.

Example 5.5.

Also in 2011, your neighbor, Claire Waters, converted 22 acres of 

streamside pasture to a filter strip by planting trees. The practice cost 

$2,500 and she received a $1,250 CRP cost-sharing payment. Waters 

calculates that the converted acres contributed an average of $520 per 

year to her livestock production income in each of the 3 years before 

the year the trees were planted. How much of the CRP payment could 

she exclude from her Federal gross income if she used the Farm Credit 

System interest rate?

Step 1: 0.10 x $520 = $52

Step 2: $2.50 x 22 = $55

Step 3: $55 from step 2 is the larger number; $55 ÷ 0.0604 = $911

Step 4: $911 is less than $1,250; Waters can exclude only $911 of 

her CRP payment, and will have to include the remaining 

$339 ($1,250 – $911) in her gross income.

Waters understands that using a lower interest rate would result in a 

higher excludable amount in step 3. She believes she can justify using 

the long-term Applicable Federal Rate, published monthly by the IRS, 

because it closely approximates her long-term alternative rate of return. 

How much of the CRP payment could Waters exclude from her Federal 

gross income if she used this lower interest rate?

Step 1: 0.10 x $520 = $52

Step 2: $2.50 x 22 = $55

Step 3: $55 from step 2 is the larger number; $55 ÷ 0.02804

 = 

$1,964

Step 4: $1,964 is larger than $1,250; Waters could exclude the 

entire $1,250 CRP payment from her gross income.

Example 5.6.

If you receive a conservation cost-sharing payment from a 

Federal or State government program, you can also expect to 

receive an IRS Form 1099-G: Certain Government Payments, 

for the amount of the payment. Therefore, even if you choose 

to exclude all or some of the payment from your gross income, 
Forest Landowners’ Guide to the Federal Income Tax 49

Including Cost-Sharing Payments in 

Gross Income

Report the amount of a cost-sharing payment that you choose 

or are required to include in your gross income as ordinary 

income. Forest owners who file as investors should report the 

amount as “miscellaneous income” on the front of IRS Form 

1040; owners who file as a sole proprietor in a trade or business should use Form 1040, Schedule C; and owners who file 

as farmers should use Form 1040, Schedule F. Cost-sharing 

payments included in gross income are subject to Federal 

and State income taxes. They also may be subject to the selfemployment tax, because self-employment income generally 

includes all items of business income, including conservation 

cost-sharing payments from government programs. The selfemployment tax is discussed in more detail in chapter 9.

To the extent that you use a cost-sharing payment included in 

your gross income for planting or seeding trees for the commercial production of timber, it may qualify for deduction and 

amortization, as described in chapter 4.

Recapture Provisions

Recapture provisions apply if trees established using an excluded cost-sharing payment are disposed of within 20 years. 

During the first 10 years, the recapture amount is the lesser 

of the amount of gain from the disposal or the amount of the 

cost-sharing payment excluded. This base amount is reduced 

by 10 percent for each year or portion of a year the trees are 

held after year 10, until it is eliminated in year 20. Report a 

recapture amount as ordinary income on IRS Form 4797; start 

on Part II of the form if you held the trees for 1 year or less or 

Part III if you held them for more than 1 year.

IRS Form T (Timber)

IRS Form T (Timber): Forest Activities Schedule (appendix B) 

was revised in 2005 to make it more compatible with electronic 

filing. Compared with previous versions of Form T (Timber), 

the optional parts concerning maps, road construction costs, and 

drainage structures, as well as the part concerning forest-related 

loss deductions, have been eliminated.

In the instructions to IRS Form T (Timber) (appendixes C 

and D), the “Who Must File” section addresses the confusion 

with previous versions of the form concerning who must file 

the form and when. You must file Form T (Timber) if you 

claim a timber depletion deduction, make or use an IRC section 631(a) election, or sell timber outright under IRC Section 

631(b). See “IRC Section 631(a) Cutting of Standing Timber 

With an Election to Treat as a Sale” and “IRC Section 631(b) 

Disposal of Standing Timber With an Economic Interest Retained or Lump-Sum,” earlier in this chapter. All of these activities involve Part II of the form, Timber Depletion.

If you do an activity covered by another part of IRS Form T 

(Timber) you should fill out the associated part(s):

1. Part I if you buy timber, cutting contracts, or forest land;

2. Part III if you sell timber or forest land;

3. Part IV if you do silvicultural practices; and

4. Part V if you make adjustments to your land account.

In years that you claim a timber depletion deduction, make or 

use an IRC section 631(a) election, or sell timber outright under IRC section 631(b), you should file Part II of IRS Form T 

(Timber), plus the part(s) associated with other forest-related 

activities you did during the year. In years that you do not do an 

activity associated with Part II of Form T (Timber), you should 

keep the part(s) associated with other forest-related activities 

you did during the year as part of your records (see the next 

paragraph, however, for the record-keeping requirements for 

owners who only have occasional timber sales).

The “Who Must File” section also includes the only written 

guidance available from the IRS as to what constitutes an occasional timber sale: “... one or two sales every 3 or 4 years ....” 

Thus, a timber sale every 2 or 3 years qualifies as an occasional 

sale. Forest owners who only have occasional timber sales are 

not required to file IRS Form T (Timber); however, they are 

required to keep records adequate to support all of their forestrelated deductions. If you do not use Form T (Timber), you are 

holding yourself out as an investor. If you wish to hold yourself out as a participant in a trade or business—or if you think 

the extent of your participation in your forest enterprise or its 

contribution to your income is sufficient that an IRS examiner 

might consider you a participant in a trade or business—you 

should use Form T (Timber).

Other Timber-Related Receipts

The sale of products manufactured from timber results in ordinary income or loss, not a capital gain or loss. This rule applies 

to all products derived from harvested trees, such as logs, lumber, pulpwood, poles, mine timbers, crossties, fence posts, fuelwood, or chips. It also applies to products derived from trees 

as they stand and to trees produced for landscaping purposes, 

such as balled nursery stock. See chapter 11 for a discussion of 

nontimber forest products.
50 Forest Landowners’ Guide to the Federal Income Tax

Information Returns

Under current law, all purchasers of standing timber are required to file an IRS Form 1099-S: Proceeds From Real Estate 

Transactions, or 1099-MISC: Miscellaneous Income, with the 

IRS to report the gross amount paid for the timber. Until recently, only purchasers under an IRC section 631(b) disposal

were required to file a Form 1099, because the payments are 

classified as royalties. Purchasers of timber in a lump-sum sale 

were not required to file a Form 1099, although many did. The 

American Jobs Creation Act of 2004 (P.L. 108-357) clouded 

this distinction by providing for lump-sum sales under section 

631(b). The IRS responded by issuing Treasury Decision (TD) 

9450, which requires purchasers of timber in a lump-sum sale 

to file a Form 1099-S. The effective date of the TD is May 28, 

2009. Thus, if you dispose of standing timber after that date, 

you can expect to receive a Form 1099, regardless of the method you use. Of course, whether or not you receive a Form 1099, 

you are required to report your timber proceeds and pay any tax 

due on them.

You also can expect to receive an IRS Form 1099-G if you receive cost-sharing payments under a Federal or State program. 

As noted previously, you also must report these payments, 

whether you choose to include them or exclude them from your 

gross income.
Forest Landowners’ Guide to the Federal Income Tax 51

Introduction

This chapter deals with voluntary exchanges and should not 

be confused with the discussion in chapter 7 on postponing the 

recognition of gain or loss when property is involuntarily converted and qualified replacement property is acquired. See Internal Revenue Service (IRS) Publication 544, Sales and Other 

Dispositions of Assets, for more details.

For various reasons, forest owners may wish to voluntarily 

exchange some or all of their timber and/or forest land for 

other property. For example, exchanges can be used to consolidate or diversify your forest and other investments, to obtain greater cash flow, and to eliminate or reduce management 

problems. In many cases, voluntary exchanges are made to 

postpone the payment of income tax on the difference between 

the exchange value of the property given up and the owner’s 

basis in the property.

Section 1031 of the Internal Revenue Code (IRC) provides that 

gain or loss is not recognized when property held for productive use in a trade or business, or for investment, is exchanged 

solely for like-kind property which also is to be held for productive use in a trade or business, or for investment. The rules 

for like-kind exchanges do not apply to stocks, bonds, notes 

or other securities, or to partnership interests. They also do not 

apply to property held for sale to customers in the ordinary 

course of a trade or business, discussed in chapter 5; thus, 

some timber properties will not qualify. Furthermore, property 

acquired solely for exchange purposes is not considered held 

for productive use in a trade or business or for investment. 

These considerations bring into question transactions involving the exchange of standing timber only for other real property when the intent is to postpone tax on the disposal of the 

standing timber. An additional consideration is whether timber 

disposed of which is to be harvested by the party receiving it 

qualifies as real property under applicable State law.

Exchanges under IRC section 1031 sometimes are referred to 

as tax-deferred or nontaxable exchanges. Postponement of gain 

or loss is achieved by carrying over to the property received in 

the exchange the basis of the property transferred. The holding 

period of the property given up likewise is transferred to the 

property received. The realized gain is deferred until the property acquired in the exchange is disposed of in a subsequent 

taxable transaction. Thus, the gain is only potentially taxable. 

Chapter 6. Tax Implications of Voluntary Property Exchanges

The tax may be avoided altogether if the replacement property 

is still held by the taxpayer at his or her death, when its basis is 

stepped-up to its date-of-death value (see chapter 4, “Original 

and Adjusted Basis”).

If, however, you receive money or nonqualifying property in the 

exchange, your gain is recognized to the extent of the sum of 

money and/or the fair market value (FMV) of the other property 

received, and is taxable. Cash and nonqualifying property received in an exchange often is referred to as boot (Example 6.1).

In 2012, to more closely consolidate your timber holdings, you 

exchanged a 40-acre tract (both land and timber) with an FMV of 

$50,000 for 30 acres of timber property with an FMV of $40,000, 

plus $10,000 in cash. Your adjusted basis in the 40-acre tract was 

$25,000. Although the realized gain is $25,000 (the difference between the total consideration of $50,000 received and the $25,000 

adjusted basis), the gain is recognized only to the extent of the cash 

received. Therefore, you pay tax only on $10,000 of gain (you must, 

however, report the entire transaction on your 2012 income tax 

return). Your basis in the 30-acre property you received is $25,000.

Example 6.1.—Exchange With Boot. 

Nonrecognition Mandatory for 

Qualified Transactions

Satisfaction of the like-kind exchange provisions results in 

mandatory application of nonrecognition treatment. Nonrecognition in such cases is not elective. Thus, you may not benefit 

from an exchange that results in a loss.

Properties Eligible for Like-Kind 

Exchange Treatment

To qualify for nonrecognition of gain, it is not necessary 

that investment property be exchanged for other investment 

property, or that property used in a business be exchanged for 

other property used in a business. The property received in 

exchange must only be of a like-kind to that given. Like-kind 

refers to the nature or character of property, not its grade or 

quality. Thus, an exchange of an item of property within one 

of the three classes used in defining like-kind property for 

another item within the same class will qualify as like-kind. 

These three classes are (1) depreciable tangible personal 

property, such as equipment; (2) other personal property, 
52 Forest Landowners’ Guide to the Federal Income Tax

including intangible personal property, nondepreciable personal property, and personal property held for investment; 

and (3) real property.

Exchange of Real Property for Real 

Property

The exchange of virtually any parcel of real property for another parcel of real property should qualify as like-kind as long as 

the interests in the property given up (the “relinquished property”) and the property received (the “replacement property”) 

are of a similar character or nature. The most common form 

of ownership interest is fee simple. A fee simple interest is not 

limited to a certain period of time. A leasehold interest is not of 

the same character or nature as a fee simple interest because a 

leasehold interest is limited to a designated time period. A lease

with 30 years or more remaining is an exception to this rule, 

however. It is considered of like-kind to a fee simple interest.

The Meaning of Investment and Trade or 

Business

As noted previously, at the time of the exchange both the relinquished property and the replacement property must be held 

either for productive use in a trade or business, or for investment. Thus, property held for use in a trade or business may be 

exchanged for investment property, and vice versa. No precise 

definition exists for what constitutes a trade or business, or an 

investment, as discussed in chapter 3. The key factor in both 

cases, however, is intention to make a profit.

Change in Use

The relinquished property may originally have been acquired 

for another purpose. Likewise, the use of the replacement 

property may be changed to a nonqualifying use at some time 

after the exchange. Such a change in use of the replacement 

property, however, may indicate an intent not to hold it for a 

qualified use at the time of the transaction. The burden is on the 

taxpayer to prove that both the relinquished property and the 

replacement property were held for productive use in a trade or 

business, or as an investment.

Time Considerations

If an exchange of like-kind properties is not simultaneous, the 

exchange must be completed (that is, the replacement property 

must be received) by the earlier of two dates: (1) the 180th day 

after the transfer of the relinquished property or (2) the due 

date (including extensions) for the transferor’s Federal income 

tax return for the tax year in which the exchange took place. 

Furthermore, in a nonsimultaneous exchange, the replacement 

property to be received by the transferor must be formally identified—or actually received without being identified—on or before the day that is 45 days after the date on which the transfer 

of the relinquished property occurred.

Multiparty Exchanges

If you want to (or will only) exchange your property for another 

particular property, but the person who wants your property 

does not own the like-kind property that you wish to acquire, 

you still can enter into a nontaxable exchange if the other person acquires the property you want and you then exchange your 

property for that property (Example 6.2).

You own 100 acres of farmland, with a low basis, for investment. 

You do not want to sell the farmland because a sale would result 

in your having to pay a large capital gain tax. You are, however, 

willing to exchange the farmland for a 200-acre tract of forest land 

that is on the market. Your neighbor wants your farm acreage, 

but does not own the forest land, and although the owner of the 

forest acreage wants to sell, he does not want your farmland. To 

consummate a transaction acceptable to all parties concerned, your 

neighbor purchases the forest property for cash from its owner. You 

then transfer your farmland to your neighbor in exchange for the 

forest acreage. The exchange is nontaxable to you if the time limits 

described previously are met.

Example 6.2.—A Multiparty Exchange.

Assumption of Liabilities

Liabilities assumed in an exchange are treated as cash equivalents (boot). The taxpayer who assumes the liability or gets 

property subject to a liability is the one who owns the boot. If 

each party assumes a liability of the other (or acquires property 

subject to a liability), only the net liability constitutes boot 

given or received (Example 6.3).

Your forest property held as an investment has an adjusted basis 

of $30,000, an FMV of $100,000, and a mortgage of $60,000. You 

exchange it for other investment real estate, which is worth $80,000 

and has a $40,000 mortgage. You also receive $5,000 in cash. Your 

realized gain is $75,000 because you received a total consideration of $105,000: property worth $40,000 ($80,000 value, minus 

$40,000 mortgage), plus the $60,000 mortgage on the property you 

transfer, plus $5,000 cash, minus your adjusted basis of $30,000. 

The recognized (currently taxable) gain, however, is limited to the 

boot of $25,000, computed as follows:

 Mortgage on property you give up................................. $ 60,000

 Less mortgage on property you receive ......................... –40,000

 Net reduction of your indebtedness ............................... 20,000

 Plus cash you receive .................................................... + 5,000

 Maximum gain to be recognized.................................... $ 25,000

Example 6.3.—Liability as Boot. 
Forest Landowners’ Guide to the Federal Income Tax 53

Exchanges Between Related 

Parties

If you exchange like-kind property with a related taxpayer, 

and within 2 years of the date of the last transfer that was part 

of the exchange, either you or the other party disposes of the 

property received in the exchange, then any gain or loss not 

recognized in the exchange is recognized on the date of the 

later transaction. Related taxpayers are brothers and sisters 

(whole and half blood), spouses, parents and grandparents, and 

lineal descendants. In-laws are not related taxpayers. Disqualifying dispositions include indirect transfers, such as to a corporation controlled by a related person. Exceptions are made for 

transfers at death and as a result of certain involuntary conversions, and for non-tax avoidance transactions.

Basis After a Nontaxable Exchange

The basis of property received in a like-kind exchange where 

no part of the gain is recognized (no boot is received) is the 

adjusted basis of the property transferred. When two or more 

properties are acquired in exchange for one, the basis of the 

exchanged property must be allocated between the properties 

received in proportion to their respective FMVs on the date of 

the exchange. If money is received as part of the exchange and 

some gain is recognized, the basis in the replacement property 

is decreased by the amount of money received and increased 

by the gain recognized. If money is paid, the basis is increased 

by the amount paid. If non-like-kind property other than cash is 

received, and some gain is recognized, the basis must be allocated (according to the respective FMVs) to all the replacement 

properties. If noncash boot is given as part of the exchange, 

and gain or loss is recognized on transfer of the boot, the basis 

of the like-kind replacement property is the total basis of all the 

relinquished properties, increased by any recognized gains on 

the boot or decreased by any recognized loss on the boot.

Application to Timber Properties

As noted previously, to qualify for nonrecognition of gain, 

property given and received in an exchange must only be of 

like-kind (of the same nature or character), not necessarily of 

like grade or quality. Timberland and unsevered timber—also 

called standing timber or stumpage—are real property. The 

right to cut and remove standing timber under the provisions of 

a timber deed or cutting contract is classified as “other personal 

property” in most States. Among the States, however, some 

variation exists regarding the classification of timber contacts. 

Because State, not Federal, law determines the legal classification of items of property, it is necessary to consult legal counsel 

for such determinations.

An exchange of forest land containing primarily premerchantable and young-growth timber for timber property containing 

mostly merchantable timber will qualify as like-kind (see the 

summary of Revenue Ruling (Rev. Rul.) 72-515, appendix A). 

An exchange of timberland, with retention of the timber rights, 

for land and timber also will qualify (see the summary of Rev. 

Rul. 76-253, appendix A), as will an exchange of bare land 

with no timber on it for land and timber (see the summary of 

Rev. Rul. 78-163, appendix A).

In general, an exchange of timberland for other real property—

such as farmland, commercial real estate, or rental property—

also will qualify as like-kind. The exchange of standing timber 

only for land and timber is an unsettled question, however. The 

IRS has not issued a formal position on this question as of September 30, 2012.

As discussed previously, property that is stock in trade or is 

property held primarily for sale to customers in the ordinary 

course of a trade or business does not qualify for like-kind exchange treatment. Thus, timber that is considered to be held primarily for sale (see chapter 5, “Determining the Type of Gain 

or Loss”) would not qualify if exchanged separately from the 

land. Such timber would qualify if it was exchanged together 

with the accompanying land, however, unless the transferor 

held timberland primarily for sale to customers in the ordinary 

course of his or her trade or business. In such cases, the timber 

is classified as an unharvested crop exchanged with the land.

Reporting of Like-Kind Exchanges

Like-kind exchanges must be reported on your tax return for 

the year the exchange is made. Exchanges of investment property (capital assets) are reported on IRS Form 1040, Schedule 

D. Exchanges of property held for use in a trade or business

are reported on IRS Form 4797. IRS Form 8824: Like-Kind 

Exchanges, also is filed to support the entries on Form 1040, 

Schedule D, or Form 4797. If the exchange is between related 

parties, Form 8824 must be filed for each of the 2 years following the year of the exchange.
54 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 55

Chapter 7. Deductible Losses: Casualties, Thefts, 

Condemnations, and Noncasualty Losses

Losses to Timber or Forest Land

If timber that you own is damaged, destroyed, or stolen, or if 

forest land that you own is condemned for public use, you may 

be entitled to a deduction on your income tax return. To take 

a deduction, you need to know the form of ownership under 

which you hold the timber or forest land, the types of losses 

that are deductible, how to calculate the deductible portion of 

your loss, the type of deduction you are entitled to, and where 

and how to take it.

Form of Ownership

With one exception, the provisions discussed in this chapter 

are available to all owners who hold timber or forest land to 

produce income, whether as an investment or part of a trade or 

business. For trees or forested land held for personal use, for 

example, residential shade trees or a wooded home site, see 

Internal Revenue Service (IRS) publication 547, Casualties, 

Disasters, and Thefts. Restrictions on loss deductions that you 

may have heard of, such as the $100, 10-percent or 2-percent 

rules, apply only to personal-use property; they do not apply to 

property held to produce income.

Deductible and Nondeductible Losses

This chapter discusses the three basic types of deductible 

losses: physical damage, theft, and condemnation. The most 

familiar example of physical damage is that resulting from a 

headline-making casualty, such as a fire or severe storm. Under 

certain circumstances, however, the destruction or damage beyond use of an income-producing asset, from causes other than 

a casualty, can result in a deductible noncasualty loss.

Other types of deductible losses include those from theft (also 

called timber trespass) and condemnation. These types of losses are similar in many respects to a casualty. For this reason, 

casualties are discussed first, then thefts and condemnations as 

they differ from casualties. Noncasualty losses are discussed 

last, because their nature and tax treatment are different from 

those of the other types of losses.

To be deductible, a loss must be physical and must represent a 

“closed and completed transaction.” This requirement means 

the loss must be fixed in time by an identifiable event or combination of events, and the event or combination of events that 

caused the loss must have run its course during the tax year. 

Taken together, these requirements mean the loss of potential 

income is not deductible. If, for example, an ice storm injures 

rather than destroys timber you own, so its growth rate is 

slowed or its future value diminished, you do not have a deductible loss. Or if a fire destroys pulpwood-sized trees you had 

been managing for sawtimber, you must base your loss deduction on the trees’ value as pulpwood—the product destroyed—

not a discounted value for sawtimber.

The loss of timber to natural mortality also is not deductible. 

Natural mortality includes trees killed because of overtopping 

by faster growing trees; overmaturity; or normal levels of disease, insects, or drought. Such losses are a cost of doing business and cannot be deducted, although they should be accounted 

for in your timber volume accounts as discussed in chapter 4.

Deductible Portion of a Loss

The amount you can deduct for a loss is limited to your adjusted 

basis in the timber or forest land affected by the loss. Because 

both timber and land increase in value over time, their economic 

value usually is greater than their adjusted basis. This can particularly be the case for timber if you have used the provisions 

described in other chapters of this guide to recover your timber 

basis as rapidly as possible. Economic losses over and above 

your adjusted basis are not deductible.

Furthermore, if returns from a damage claim, salvage harvest, 

insurance recovery, court award, or other compensation exceed 

your basis in the timber or forest land lost, you will have a gain 

instead of a deductible loss. Unless you elect to defer recognition of the gain as explained in the “Treatment of Gain” section 

later in this chapter, you must report it and pay tax on it.

Type of Deduction and How To Report It

The type of deduction you can take for a loss depends on 

whether you have held your timber or forest land for more 

than 12 months. How you report the loss depends on the type 

of loss and whether you hold your timber or forest land as an 

investment or part of a trade or business. All these factors are 

explained in this chapter.
56 Forest Landowners’ Guide to the Federal Income Tax

Casualty

Definition

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, 

and unusual. For this definition “sudden” means swift, not 

gradual or progressive; “unexpected” means not ordinarily 

anticipated or intended; and “unusual” means not a day-to-day 

occurrence, not typical of the activity you were engaged in.

A deductible loss can result from a variety of causes, including but not limited to earthquake; flood; fire (see the following 

paragraph for exceptions); storm, including an ice storm, hurricane or tornado; mine cave-in; vandalism; volcanic eruption; 

terrorist attack; auto accident (see the following paragraph for 

exceptions); or shipwreck.

Disease, insect infestation, drought, or combinations of factors 

seldom qualify as a casualty, because these types of damage 

tend to be gradual or progressive rather than sudden. A massive 

southern pine beetle infestation that killed residential shade 

trees in 5 to 10 days, however, did qualify as a casualty (Revenue Ruling (Rev. Rul.) 79-174). In addition, losses are not 

deductible if they result from accidental breakage, the actions 

of a family pet, a fire the owner willfully set or paid someone 

else to set, a car accident caused by the owner’s willful negligence or willful act, or progressive deterioration.

Calculating Your Loss From a Casualty

The basic method for calculating the amount of a loss from a 

casualty is:

1. Determine your adjusted basis in the property before the 

casualty;

2. Determine the decrease in fair market value (FMV) of the 

property as a result of the casualty; then

3. The amount of the loss is the smaller amount from steps 1 

and 2, minus any insurance or other reimbursement that you 

receive or expect to receive.

If property held for an investment or part of a trade or business

is completely destroyed, FMV is not considered. The amount 

of the loss is your adjusted basis in the property, minus any salvage value, and minus any insurance or other reimbursement 

you receive or expect to receive (Examples 7.1 and 7.2).

Fair Market Value. FMV is the price for which you could 

have sold the property damaged or destroyed by the casualty to 

a willing buyer if neither of you were compelled to sell or buy 

and both of you had reasonable knowledge of the relevant facts.

In general, a competent appraisal is needed to determine the difference between the FMV of the property immediately before 

and immediately after a casualty. Several factors are important 

to evaluating the accuracy of an appraisal, including: the appraiser’s familiarity with your property before and after the 

casualty, their knowledge of sales of comparable property in the 

area, their knowledge of conditions in the area of the casualty, 

and their method of appraisal. Factors an appraisal should not 

consider include the cost of protecting your property against 

a casualty, incidental expenses related to the casualty, the cost 

of replacing a used item damaged or destroyed by the casualty 

with a similar new item, sentimental value, the cost of the appraisal itself or of photographs taken to document your loss, or 

any general market decline that occurs following the casualty.

You may be able to use an appraisal that you used to get a Federal loan or a Federal loan guarantee as a result of a Federally 

declared disaster (see “Federally Declared Disasters,” later in 

this section) to establish the amount of your loss. In the absence 

of an appraisal, the cost of cleaning up or repairing damaged 

property after a casualty may provide a measure of the decrease 

in FMV, as long as the repairs actually are made, they are necessary to return the property to its condition before the casualty, 

the amount spent is not excessive, and the repairs only fix the 

damage and do not increase the value of the property to greater 

than its value before the casualty.

A portable sawmill you own was damaged by a fire but not completely destroyed. You carried no insurance on it. Your adjusted 

basis in the sawmill building and equipment is $6,500. The FMV 

of the sawmill was $5,000 immediately before the fire and $3,500 

immediately after. Under these facts, your casualty loss is $1,500 

($5,000 – $3,500), because that amount is less than your adjusted 

basis in the property.

Had the FMV of the sawmill been $8,000 before the fire and $1,000 

after, the decrease in FMV would have been $7,000 ($8,000 – 

$1,000), but your deductible casualty loss would have been limited 

to your $6,500 adjusted basis in the property.

Example 7.1.—Income-Producing Property Partially Destroyed.

Assume the portable sawmill in Example 7.1 was totally destroyed. 

After the fire the building and equipment had a combined value of 

only $300 as scrap. Your deductible casualty loss is $6,200 ($6,500 

adjusted basis – $300 scrap value). FMV is not considered.

Example 7.2.—Income-Producing Property Completely.
Forest Landowners’ Guide to the Federal Income Tax 57

Single Identifiable Property. In general, a separate loss calculation must be made for each single identifiable property (SIP) 

that is damaged or destroyed. Before 1999, IRS Rev. Rul. 66-9 

and 73-51 effectively limited the SIP in a timber casualty to 

the individual trees suffering mortal injury. In lengthy court

cases against the IRS, however, several forest industry firms 

successfully argued that the correct measure of timber they lost 

in natural disasters was the district or block they used to keep 

track of their adjusted basis.5

 The IRS responded to the cases 

by issuing Rev. Rul. 99-56, which revoked the earlier rulings 

and defined the SIP for timber held to produce income as the 

block directly affected by the casualty (see the related discussion of qualified timber property in chapter 4, “Reforestation 

Tax Incentives”). Thus, if you suffer a timber casualty, the SIP 

for calculating your loss is the block or record-keeping unit 

that you use to keep track of your basis in the timber that was 

damaged or destroyed by the casualty (Examples 7.3 and 7.4).

Using the block method of calculating your loss from a timber 

casualty also is a three-step process:

1. Determine your adjusted basis in the block on which the 

loss occurred. If you keep track of the basis of all your 

timber in one depletion account, use the total amount in that 

account.

2. Determine the difference in the FMV of the block immediately 

before and immediately after the casualty. Your estimate of 

the FMV immediately after the casualty should include the 

value of any salvageable timber in the block.

3. The amount of your loss is the smaller amount from steps 1 

and 2, minus any insurance or other reimbursement that you 

receive or expect to receive.

Unless the damage from a casualty is so severe that it affects the underlying value of the property, the measure of the 

decrease in the FMV of the block usually is the value of the 

timber damaged or destroyed. The units used to measure the 

volume of timber lost should be the same as those you use for 

your timber depletion account: cords, board feet, cubic feet, 

tons, etc. The number of units damaged or destroyed must be 

established by a fair and reasonable estimate. For this reason, 

you may wish to have a professional forester, such as a consulting forester or a service forester with the State forestry 

agency, help you with the estimate. In general, the greater the 

loss, the more important the qualifications and credentials of 

the professional you use.

Assume the same facts as in Example 7.1, except that in 1995 

the Alders purchased a tract of forest land in the mountains 350 

miles away instead of one adjacent to the inherited property on the 

coastal plain. This tract contained mixed species of sawtimber-size 

upland hardwoods. They allocated the cost of acquisition proportionately between the land and timber, but because the markets for 

the mountain timber were different from those for the coastal plain 

timber, they established a separate merchantable timber account for 

the newly purchased tract, making it a different block for depletion 

purposes. In 2011, a tornado came through the Alder’s coastal plain 

property, destroying a significant portion of the timber. Because the 

Alders keep track of the basis of their timber on the coastal plain 

and mountain tracts in separate accounts, the SIP for calculating 

their casualty loss is limited to the timber on the coastal plain tract. 

The timber on the mountain tract cannot be included.

Example 7.4.—Multiple SIPs.

Mr. and Mrs. Alder inherited a tract of forest land on the coastal 

plain from Mr. Alder’s mother in 1978. They established land and 

timber accounts at that time, based on the FMV of the tract as of 

the mother’s date of death. The timber was a mixture of hardwoods 

and pine, so they established separate merchantable timber subaccounts for hardwood and pine, plus an additional subaccount for 

premerchantable pine. By 1990, the timber in the premerchantable 

pine subaccount had reached merchantable size, so they transferred the volume and cost basis to the merchantable pine timber 

subaccount. In 1995, the Alders purchased a tract of merchantable 

pine sawtimber adjacent to the inherited tract. They allocated the 

cost of acquisition proportionately between the land and timber and 

incorporated the basis for the timber into the existing merchantable 

pine timber subaccount. In 2011, a tornado came through their 

forest tract, destroying a significant portion of the timber. Because 

the Alders keep track of the basis of all their timber in one depletion account, the SIP for calculating their casualty loss is their entire 

timber ownership.

Example 7.3.—Multiple Tracts, One SIP.

5

 See Westvaco Corp. vs. United States, 639 F.2d 700 (Ct. Cl. 1980) and Weyerhaeuser vs. United States, 92 F.3d 1148 (1996) (reversing in part and affirming in part), 32 Fed. 

Cl. 80 (1994) (certiorari denied), 519 U.S. 1091 (1997).

Destruction of Buildings or Equipment. If buildings or 

equipment that you use for the production of income are partially destroyed, your deductible loss is the lesser of your adjusted basis in the property or the decrease in FMV caused by 

the casualty, minus any insurance or other reimbursement you 

receive or expect to receive. If income-producing property is 

completely destroyed, FMV is not considered; your deductible 

loss is your adjusted basis in the property, minus any insurance 

or other compensation you receive or expect to receive. Examples 7.1 and 7.2 illustrate these principles.

Destruction of Premerchantable Timber. The destruction of a 

premerchantable stand or plantation may result in a deductible 

loss if you have maintained a separate subaccount for it (a young 
58 Forest Landowners’ Guide to the Federal Income Tax

growth or plantation subaccount; see chapters 4 and 15) and you 

have basis allocated to the account (Rev. Rul. 81-2 and 90-61). 

The unit of measure for the loss will be acres.

Salvage Requirement. If your timber is damaged rather than 

destroyed, you are obligated to make a genuine effort to salvage 

it. You are not, however, required to use any more aggressive 

procedures than you would for any timber sale. So, for example, 

if you do not ordinarily cut your own timber, stack it, or transport it to a mill, you would not be expected to do any of these 

things to salvage the value remaining in the damaged timber.

A salvage sale is a separate transaction from the loss, although 

if you are able to salvage your timber in the same tax year as 

the loss, it may be easier to report the loss and salvage sale as 

a single event. If you are unable to sell salvageable timber, for 

example, because of an oversupply of damaged timber on the 

market, you should keep records to document that you made a 

bona fide effort.

Year of Deduction. You ordinarily deduct a loss from a casualty on your tax return for the year the casualty occurred (see 

“Federally Declared Disasters,” immediately following, for 

exceptions). If you reasonably expect to receive reimbursement 

from a damage claim, insurance settlement, or other compensation, reduce your loss deduction by the amount you expect 

to receive. Do this even if you have not received all the reimbursement by the end of the year or even by the date you file 

your tax return (Example 7.6 illustrates this principle).

If your final reimbursement is less than you expected, deduct 

the difference as an additional loss on your tax return for the 

year it becomes certain you will not receive any more reimbursement (Example 7.7 illustrates this principle). If your final 

reimbursement is more than you expected—but still less than the 

deductible amount of your loss—report the difference as “Other 

income” on your tax return for the year you receive the reimbursement. Do not file an amended tax return for the year you 

originally deducted the loss.

If your final reimbursement is more than the deductible amount 

of your loss, you have a gain instead of a loss. See “Treatment of 

Gain,” later in this chapter, to find out how to postpone recognition of the gain, or how report the gain and pay the tax on it.

Deducting a Loss From a Casualty

To take a casualty loss deduction, you must be able to show 

the event that caused the casualty loss and when it occurred, 

that the loss was a direct result of the event, that you were the 

owner of the affected property or that you leased it and were 

contractually liable to the owner for the damage, and whether 

a claim for reimbursement exists for which you have a reasonable expectation of recovery. Because of these requirements, 

it is important to have records to support your casualty loss 

deduction. If you do not have actual records—for example, 

because they were destroyed—you will need to find other satisfactory evidence.

As noted previously, you ordinarily deduct a loss from a casualty on your tax return for the year it occurred. Report the 

loss first on IRS Form 4684: Casualties and Thefts, Section B, 

whether you hold your forest property as an investment or part 

of a trade or business. You can report losses on up to four SIPs 

from the same casualty on one form. Use additional forms to 

report losses on more than four SIPs or from more than one 

casualty event. Investors who have held their forest property for 

1 year or less go next to IRS Form 1040, Schedule A, the line 

marked “Casualty and Theft Losses.” Losses reported on this 

line are not subject to the 2 percent of adjusted gross income 

floor. Investors who have held their forest property for more 

than 1 year also go next to Form 1040, Schedule A, unless otherwise required to use IRS Form 4797. Participants in a trade or 

business go next to IRS Form 4797; those who have held their 

forest property for 1 year or less, start at Part II, whereas those 

who have held their forest property for more than 1 year, start 

at Part I. Partnerships and Subchapter S corporations use other 

forms. If your loss was substantial, you also should adjust your 

timber basis using IRS Form T (Timber), Part II (Example 7.5).

Federally Declared Disasters

If your loss resulted from a Federally declared disaster, you can 

choose to deduct it on an original or amended return for the year 

immediately before the year the disaster took place. This prevents 

your having to wait up to a year to take the deduction. In addition, 

the IRS may postpone for up to 1 year certain tax deadlines, for 

example, the deadlines for filing tax returns or making IRA contributions, for taxpayers affected by a Federally declared disaster. The 

IRS Web site contains information on the provisions specific to any 

Federally declared disaster that may affect you; simply type the 

name of the disaster or the word “disasters” in the search window 

on the IRS home page (http://www.irs.gov/; see chapter 14).

Qualified disaster mitigation payments you receive to repair damage to your property caused by a Federally declared disaster, or to 

reduce the risk of future damage, are not taxable income to you. 

You cannot, however, deduct as a business expense or increase 

your basis in the property by any expenditure made with funds 

from a qualified disaster mitigation payment. Similarly, if part of a 

Federal disaster loan you receive to repair damage from a Federally 

declared disaster is cancelled, it does not result in taxable income 

to you. The cancellation is considered to be reimbursement for the 

loss and reduces your casualty loss deduction.
Forest Landowners’ Guide to the Federal Income Tax 59

1. Determine your adjusted basis in the block on which the theft 

occurred;

2. Determine the difference in the FMV of the block

immediately before and immediately after the theft; then

3. The amount of the loss is the smaller amount from steps 

1 and 2, minus any insurance, court award, or other 

reimbursement that you receive or expect to receive.

All the previous information about FMV, appraisals, and treatment of reimbursements applies to a theft loss exactly as it does 

to a casualty. Also as with a casualty, the measure of the decrease 

in the FMV of the block affected by the theft, in general, is the 

value of the timber lost. The salvage value of the timber is considered to be zero, however, because you no longer possess it 

(Examples 7.6 and 7.7).

You acquired 40 acres of forest land 10 years ago for a total cost of 

$23,400. The tract had been harvested and reforested only a few 

years earlier, so the trees were not yet of merchantable size. Nevertheless, you assigned value to their years of growth and allocated 

$18,000 to your land account and $5,400 to your timber account. 

Last year, 17 acres of the trees were completely destroyed by a 

fire. Immediately before the fire, the entire plantation contained 640 

cords of pulpwood, 272 of which were located on the 17 acres that 

burned. Also, last year a neighbor sold comparable pulpwood for 

$14 per cord. Calculate your casualty loss deduction and your new 

adjusted timber basis in the block.

Your basis in the block on which the loss occurred is $5,400. The 

difference in the FMV of the block immediately before and immediately after the fire is the value of the trees destroyed, or $3,808 (272 

cords x $14 per cord). Your casualty loss deduction is the smaller of 

the two amounts, or $3,808.

Your adjusted timber basis in the block is $1,592 ($5,400 – $3,808). 

Report the casualty on IRS Form 4684. If you hold the forest land as 

an investment, go next to IRS Form 1040, Schedule A; if you hold 

it as part of a trade or business, go next to IRS Form 4797, Part I. 

Also fill out Form T (Timber), Part II, to show the adjustment to your 

timber basis.

Example 7.5.—Loss From a Casualty.

In 2011, a logging contractor working on a neighbor’s property intentionally crossed the boundary and cut timber from your property 

as well. The FMV of the stolen timber was $21,500 and your adjusted basis in the block on which the theft occurred was $5,500. You 

expected to recover the full value of the timber in court. Because 

the amount you expected to recover was more than your adjusted 

basis in the affected block you had no deductible loss, although 

your case was not even scheduled to come to court in 2011. You 

understand that if you choose to recognize the $16,000 difference 

between the FMV of the timber and your adjusted basis in the 

block you will have to report it as “Other income” (see “Treatment of 

Gain,” later in this chapter).

Example 7.6.—Expected Recovery From a Theft Loss.

Theft Loss

Definition

A theft loss occurs when someone takes and removes property 

or money with the intent to deprive you of it, including by larceny, robbery, burglary, blackmail, embezzlement, or extortion. 

The taking of property or money by fraud or misrepresentation 

also qualifies as theft if it is illegal under State or local law. 

Theft loss does not, however, include a decline in the market 

value of stock or property that is simply mislaid or lost.

Differences From a Casualty

A theft loss is treated the same as a casualty loss for tax purposes, except that reporting a reimbursement from a theft loss 

may be more complicated. If you successfully identify and 

prosecute the guilty party, you must treat a court award that 

includes damages as two parts: (1) the reimbursement, for example, one-third of triple damages, which you subtract from 

the loss, and (2) the damage award, for example, two-thirds of 

triple damages, which you report as “Other income” on your 

tax return for the year you receive it. You should attach a statement to your return explaining that the income is the proceeds 

from an involuntary conversion.

Calculating Your Loss From a Theft

Use the same three-step approach to calculate a theft loss of 

timber as you would for a casualty loss:

The day after you filed your 2011 tax return, the logging contractor’s 

lawyer advised you that the contractor was on the verge of bankruptcy and offered you $6,000 to settle your claim out of court. You 

accepted, fearing you might not receive any reimbursement at all if 

you waited for the case to come to court. You still had no deductible loss. Although the amount you received was much less than the 

FMV of the stolen timber, it was greater than your adjusted basis 

in the block on which the theft occurred. If you choose to accept 

the settlement in 2012, you will have report the $500 gain ($6,000 

recovery – $5,500 adjusted basis) as “Other income” on your tax 

return for 2012 (see “Treatment of Gain,” later in this chapter). Your 

adjusted basis in the timber remaining in the block will be $0.

Example 7.7.—Actual Recovery Different Than Expected.

Deducting a Theft Loss

To take a theft loss deduction, you must be able to show that 

your property was stolen, when you discovered it was missing, 

that you were the owner of the property, and whether a claim 

for reimbursement exists for which you have a reasonable expectation of recovery. If you do not have written records, you 

will have to find other satisfactory evidence to support your 

theft loss deduction.
60 Forest Landowners’ Guide to the Federal Income Tax

Deduct a theft loss on your tax return for the year you discover 

the loss. You do not have to determine the year the theft took 

place and file an amended return for that year. Report a theft 

loss exactly as you would a casualty. Start on IRS Form 4684, 

Section B, whether you hold your forest as an investment or 

part of a trade or business. From Form 4684, investors who 

have held their forest property for 1 year or less go to IRS Form 

1040, Schedule A. Investors who have held their forest property 

for more than 1 year also go to Form 1040, Schedule A, unless otherwise required to use IRS Form 4797. Participants in 

a trade or business go to Form 4797; those who have held their 

forest property for 1 year or less, start at Part II, whereas those 

who have held their forest property for more than 1 year, start 

at Part I. Partnerships and Subchapter S corporations use other 

forms. If your loss was substantial, you should adjust your timber basis on IRS Form T (Timber), Part II.

Condemnation

Definition

A condemnation is the legal process by which private property 

is taken for public use without the owner’s consent. The property may be taken by a unit of government, a political subdivision, or a private organization that has the legal power to take 

it. The owner receives a condemnation award in money or 

property in exchange for the property taken. Thus, a condemnation is like a forced sale, with the owner being the seller and the 

condemning authority being the buyer. The tax provisions are 

the same whether the property goes through the condemnation 

process or the owner sells it under threat of condemnation.

The Condemnation Award. The condemnation award is the 

money you are paid or the value of other property you receive 

for your property when it is condemned or you sell it under 

threat of condemnation. Amounts taken out of the award to 

pay debts, for example, to pay the holder of a mortgage or lien 

against your property, are considered paid to you even if the 

debt attaches to the property and is not your personal liability.

Condemnation for a Right-of-Way Easement. Condemnation of land for a utility or other right-of-way easement usually 

involves the taking of any timber growing on the right-of-way 

and the right to grow timber there in the future, but not taking 

legal title to the land. In the case of power lines or pipelines, 

you may be permitted to grow agricultural crops on the rightof-way, but timber production usually is not permitted because 

the trees would interfere with the power lines or pipelines. No 

deduction is permitted for the value of future timber income 

foregone, so you should make sure the value of such income is 

considered in the negotiations for the condemnation award. In 

all other respects, a condemnation for a right-of-way easement 

is treated the same as a sale.

Differences From a Casualty

A condemnation differs from a casualty in two ways. First, a 

condemnation may not involve the basis of the timber affected, 

but always involves the basis of the land. If the condemning authority is interested only in the land and permits you to sell the 

timber, you apply the adjusted basis of the timber sold against 

your sale proceeds. No timber basis will be left to deduct from 

the condemnation award. Deduct the adjusted basis of the land 

affected by the condemnation—plus the adjusted basis of any 

timber you are not permitted to sell—from your condemnation 

award.

Second, the basis of timber and land lost in a condemnation is 

calculated in the same way as for a sale (chapter 5). To find the 

basis of timber lost, determine the depletion unit by dividing 

your adjusted basis in the affected block by the total volume of 

timber in the block, updated to directly before the condemnation. Then multiply the depletion unit by the volume of timber 

on the condemned acres. To find the basis of land lost, divide 

the basis in your land account by the total number of acres you 

own, and then multiply the result (the depletion unit) by the 

number of acres condemned.

Calculating Your Loss From a 

Condemnation

Calculate your loss from a condemnation by comparing your 

adjusted basis in the condemned property with your net condemnation award (see “Amounts Not Included in a Condemnation 

Award,” immediately following). If your net condemnation award 

is the smaller of the two amounts, you have a loss (Example 7.8).

Amounts Not Included in a Condemnation 

Award

Interest. Interest the condemning authority pays you for any 

delay in paying your award is not part of the condemnation 

award. Report such interest separately as ordinary income.

Payments To Relocate. Payments you receive to relocate and 

replace a house, business, or farm as a result of Federal or Federally assisted programs are not part of the condemnation and 

are not included in your income. Instead, add such payments to 

your basis in the replacement property.
Forest Landowners’ Guide to the Federal Income Tax 61

Severance Damages. Payments you receive when part of your 

property is condemned and the value of the part you keep is 

decreased because of the condemnation are severance damages and are not part of the condemnation award. Examples 

of severance damages include payments you receive because 

your property becomes subject to flooding after you sell flowage easement rights under threat of condemnation, or payments 

to offset the cost of replacing fences, digging new wells or 

ditches, or planting trees to restore your property to its previous 

level of usefulness after part of it is condemned for a highway 

right-of-way. Deduct the net severance damages from your 

basis in the remaining property. If the severance damages are 

based on damage to a specific part of the property you keep, 

deduct them from your basis in only that part of the property.

The contracting parties must agree in writing on the amount of 

severance damages. If the amount is not specified, in the sale 

contract or closing papers, for example, all proceeds from the 

condemnation are considered to be condemnation award.

Special Assessments Retained Out of a Condemnation 

Award. A unit of government may condemn part of your property to install an improvement, for example, to widen a road, 

then levy a special assessment against the remaining part of the 

property because it benefits from the improvement and deduct 

the special assessment from your condemnation award. Do not 

include a special assessment retained out of a condemnation 

award in the award. If your proceeds from a condemnation 

include severance damages, first apply the special assessment 

against the severance damages to calculate your net severance 

damages. Apply any balance of the special assessment remaining against the condemnation award to calculate your net condemnation award.

Deducting a Condemnation Loss

Deduct a loss from a condemnation on your tax return for the 

year in which the loss occurs. How you treat the loss depends 

on the form of payment for the condemnation award, the form 

of ownership under which you held the property condemned, 

and how long you owned it. Most of the discussion in this chapter assumes the condemnation award is made in money, but it 

also may be made in property. Treat an award made in money 

as described here, but treat an award made in property as described in the “Treatment of Gain” section later in this chapter.

Investors who have held their forest property for 1 year or less 

report a loss from a condemnation using IRS Form 1040, Schedule D. Investors who have held their property for more than 1 year 

use IRS Form 4797, starting at Part I. Participants in a trade or 

business also use Form 4797; those who have held their forest 

property for 1 year or less, start at Part II, whereas those who 

have held their property for more than 1 year, start at Part I.

Property held primarily for sale to customers or for personal 

use is treated differently from income-producing property. If 

you hold timber or forest land primarily for sale to customers

in the ordinary course of business, report a loss from a condemnation as an ordinary loss regardless of how long you owned 

the property. Use the appropriate business schedule: IRS Form 

1040, Schedule C, or Schedule F if you qualify as a farmer. If 

you hold trees or forested land as personal property, you cannot 

deduct a loss from a condemnation.

Noncasualty Loss

Definition

A noncasualty loss is the destruction, damage beyond use, or 

loss of property resulting from an identifiable event. Like a 

casualty, the precipitating event for a noncasualty loss must be 

unusual and unexpected, but unlike a casualty, it does not have 

to be sudden. Consequently, in general, noncasualty losses result from events that are gradual or progressive. For example, 

insect attacks have resulted in deductible noncasualty losses of 

timber (Rev. Rul. 87-59) and droughts have resulted in deductible noncasualty losses of seedlings (Rev. Rul. 90-61).

Some years ago, you purchased a 50-acre tract of forest land for 

$68,000, allocating $22,300 to the land account and $45,700 to the 

timber account. Now the county has condemned 5 acres to improve 

a road that runs along one side of the tract. You are permitted to 

sell the merchantable timber on the condemned land—25 thousand 

board feet (MBF) out of 190 MBF total for the tract. Calculate how 

much of the basis in the timber and land you should apply against 

the net condemnation award to determine whether you have a loss 

or a gain.

Timber Basis. Your basis in the timber you are permitted to sell is 

$6,013 [($45,700 total timber basis ÷ 190 total MBF) x 25 MBF on 

the condemned acres]. But you will deduct the entire amount from 

the proceeds of the sale. None will be left to apply against the net 

condemnation award.

Land Basis. Your basis in the 5 acres being condemned is $2,230 

[($22,300 total basis in land ÷ 50 total acres) x 5 acres condemned]. 

That is the amount you will apply against the net condemnation 

award. If the award is less than $2,230 you will have a deductible 

loss, if it is more than $2,230 you will have a gain.

Example 7.8.—Condemnation.
62 Forest Landowners’ Guide to the Federal Income Tax

Timber also may be damaged or destroyed by a combination 

of factors. For example, a fire that does little visible damage to 

trees may weaken them to the point they fall victim to disease, 

or a drought may stress trees to the point they become susceptible to insect attack. With such combinations of factors, it is 

necessary to consider how unusual and unexpected the contributing events are in order to determine whether the damage 

qualifies as a noncasualty loss.

Differences From a Casualty

A noncasualty loss is a business deduction. With one exception, 

owners who hold their timber or forest land as an investment 

cannot deduct a loss of this type. The exception is unusual and 

unexpected losses from drought, which may be deducted for 

either a trade or business or a transaction entered into for profit 

(an investment).

Calculating a Noncasualty Loss

Calculate the basis of timber lost to a noncasualty event as you 

would for a sale or condemnation. Divide your adjusted basis 

in the affected block by the total volume of timber in the block, 

updated to immediately before the loss, then multiply the result 

(the depletion unit) by the volume of timber lost (Example 7.9).

Treatment of Expenses

A loss frequently gives rise to related expenses that are not includable as part of the loss. Such expenses often are deductible, 

but where you should take the deduction differs according to 

the type of loss.

Casualty or Theft Loss

The cost of insurance or measures to protect your property 

against loss, an appraisal or timber cruise to determine the extent of a loss, photographs to document the loss, or incidental 

expenses related to the loss are deductible to the extent they 

qualify as “ordinary and necessary” expenses (see chapter 4, 

“Currently Deductible Costs: Operating Expenses and Carrying 

Charges”). If you hold your forest land as an investment, report 

such expenses on IRS Form 1040, Schedule A, the “Miscellaneous deductions” section, where they will be subject to the 

2 percent of adjusted gross income floor. If you hold your forest as part of a trade or business, report them on IRS Form 

1040, Schedule C, or Schedule F if you qualify as a farmer. 

Do not add expenses related to a casualty or theft loss to the 

amount of the loss.

Condemnation

Subtract the expenses of obtaining a condemnation award, such 

as legal, engineering, or appraisal fees, from the total award 

and use the net award to calculate your gain or loss. Similarly, 

subtract your expenses of obtaining severance damages from the 

severance damage award and deduct the net award from your 

basis in the remaining property. If it is not clear which expenses 

are for the condemnation award and which are for severance 

damages, allocate them proportionately between the two.

Noncasualty Loss

Deduct expenses related to a noncasualty loss, such as the cost

of a cruise or appraisal to determine the extent of the loss, as 

you would for a casualty or theft loss. If you hold your forest as 

an investment, you can deduct expenses related to a noncasualty 

loss to the extent they qualify as “ordinary and necessary” expenses (see chapter 4, “Currently Deductible Costs: Operating 

Expenses and Carrying Charges”), even if you cannot deduct 

the loss itself. Use IRS Form 1040, Schedule A, the “Miscellaneous deductions” section, where your deduction will be subject 

to the 2 percent of adjusted gross income floor. If you hold your 

forest as part of a trade or business, use IRS Form 1040, Schedule C, or Schedule F if you qualify as a farmer.

Pulpwood-sized timber that you held as an investment was killed 

over a period of 9 months by an unusual and unexpected beetle 

infestation. The FMV of the timber killed was $9,000 and your allowable basis in it was $3,500. How much of the loss can you deduct?

The loss does not meet the suddenness test for a casualty, so it only 

can be deducted as a noncasualty loss. As an investor, you cannot 

deduct a loss of this type. If you had held the timber as part of a 

trade or business, you could have deducted your $3,500 allowable 

basis in the timber killed on IRS Form 4797.

Example 7.9.—Noncasualty Loss.

Deducting a Noncasualty Loss

Deduct a noncasualty loss of timber held for use in a trade or 

business—or a noncasualty loss due to drought of seedlings 

held for investment—in the year the loss occurs. Start on IRS 

Form 4797, Part II, for timber held for 1 year or less, or Part 

I for timber held for more than 1 year. The loss will be netted 

with other gains and losses from disposals of business property. In contrast to casualty and theft losses, which are deducted 

first from ordinary income, noncasualty losses are deducted 

first from capital gains. This treatment of noncasualty losses 

is a disadvantage, because capital gains receive more favorable tax treatment.
Forest Landowners’ Guide to the Federal Income Tax 63

Treatment of Gain

If timber or forest land that you own is damaged or destroyed, 

stolen, condemned for public use, or sold under threat of condemnation and you receive payment in the form of a damage 

claim, salvage proceeds, insurance recovery, court award, or 

other compensation, the transaction is called an involuntary 

conversion or involuntary exchange. As noted at the beginning 

of the chapter, if the payment you receive is greater than your 

basis in the timber or forest land lost, you will have a gain instead of a deductible loss (Example 7.10). Unless you elect to 

defer recognition of the gain as explained in this section, you 

will have to report it and pay tax on it (see “Reporting a Gain,” 

later in this section).

Allowable Replacement Period. For a casualty, theft loss, or 

noncasualty loss, the allowable replacement period is 2 years 

after the close of the 1st tax year in which you realize any portion of the gain. For a condemnation, the allowable replacement 

period is 2 years after the close of the 1st tax year in which you 

realize any portion of the gain for personal property, but 3 years 

for real property.

Timber generally is considered real property, but in States that 

have adopted part or all of the Uniform Commercial Code, timber under contract for sale may be considered personal property. 

For this reason, if timber you have under contract for sale is 

condemned, you may wish to purchase qualifying replacement 

property within 2 years unless you are certain the law in your 

State defines timber under contract for sale as real property.

Making the Election. Elect to postpone recognition of a gain 

by attaching a statement to your tax return that includes the following:

1. A description of the involuntary conversion;

2. A statement that you elect to postpone recognition of the 

gain; and

3. A description of the replacement property.

If you have not identified or completed your purchase of the 

replacement property by the time you file your tax return for the 

year the involuntary conversion occurred, simply describe the 

conversion and state that you are electing to postpone recognition of the gain. Then describe the replacement property on a 

separate statement attached to your tax return for the year you 

complete the purchase.

The amount of gain deferred cannot exceed the FMV of the 

converted property. Your basis in the replacement property is its 

cost, minus the amount of the deferred gain. If you do not use 

all the gain to purchase qualifying replacement property, you 

must report the unused portion as “Other income” and pay tax 

on it (see “Reporting a Gain,” later in this section).

You generally cannot defer recognition of a gain if you purchase your replacement property from a related person, unless 

the related person obtained the property from an unrelated 

person during the replacement period. This provision does not 

apply to noncorporate taxpayers if the aggregate amount of the 

gain was $100,000 or less.

Property Received as Compensation. The previous discussion 

assumes that you receive money as compensation for an involuntary conversion, but you also may receive property. Do not 

report compensation you receive in the form of property that 

is similar or related in service or use to the converted property, 

Assume the 17 acres of pulpwood-sized trees damaged by fire in 

Example 7.5 were salvageable instead of completely destroyed. You 

are able to locate a buyer who pays you $3,000 for them. You have 

$500 of deductible expenses from the sale. Remember your new 

adjusted basis in the block is $1,592, the entire plantation contained 

640 cords of pulpwood, and the 17 acres that burned contained 

272 cords. What is your gain from the salvage sale?

Your depletion unit for the salvage sale is $2.49 ($1,592 adjusted 

basis ÷ 640 total volume) and your depletion deduction is $677 

($2.49 depletion unit x 272 cords salvaged). This gives you a gain 

from the salvage sale of $1,823 ($3,000 sale proceeds – $677 

depletion deduction – $500 sale expenses).

Example 7.10.—Gain From an Involuntary Conversion. 

Postponing Recognition of a Gain

You can defer recognition of a gain from an involuntary conversion, and the resulting tax on it, by using the gain to purchase 

qualifying replacement property (Rev. Rul. 80-175), within the 

allowable replacement period.

Qualifying Replacement Property. Qualifying replacement 

property includes the following:

1. Restoration work to repair damage, clean and clear drainage 

systems, or replace culverts, fences, gates, and roads;

2. The cost of replacement timber sites;

3. The cost of seeds or seedlings for replanting;

4. The costs associated with sowing seeds or planting seedlings on land that you own, lease, or buy as a replacement 

timber site; or

5. Stock to acquire or gain 80 percent or greater control of a 

corporation that owns timber, timberland, or both.

In the case of a condemnation, if only part of your property is 

condemned you can treat the cost of restoring the remaining 

part to its former usefulness as the cost of replacement property.
64 Forest Landowners’ Guide to the Federal Income Tax

even if the FMV of the new property is higher than that of the 

converted property. Your basis in the new property is the same 

as your basis in the converted property. Any gain on the involuntary conversion is deferred until you make a taxable sale or 

exchange.

Reporting a Gain

In some circumstances, it may be more advantageous to you to 

recognize a gain from an involuntary conversion than to defer 

it. Where you should report the gain depends on the type of loss 

and whether you hold your forest property as an investment or 

as part of a trade or business.

Casualty or Theft Loss. Report a gain from a casualty or theft 

loss first on IRS Form 4684, Section B, whether you hold your 

forest property as an investment or part of a trade or business. 

Investors who have held their forest property for 1 year or less 

go next to the front of IRS Form 1040, the line for gains or 

losses from IRS Form 4797, unless otherwise required to file 

Form 4797. Investors who have held their forest property for 

more than 1 year and participants in a trade or business go next 

to Form 4797.

Condemnation. Investors who have held their forest property 

for 1 year or less report a gain from a condemnation on IRS 

Form 1040, Schedule D. Investors who have held their forest 

property for more than 1 year and participants in a trade or 

business use IRS Form 4797.

Noncasualty Loss. Report a gain from a noncasualty loss on 

IRS Form 4797.

For more information on deductible losses, see IRS publications 225, Farmer’s Tax Guide; 334, Tax Guide for Small Business; 544, Sales and Other Dispositions of Assets; and 547, 

Casualties, Disasters, and Thefts.

Walter Greenleaf owns 320 acres of forest land that were damaged by 

a storm with hurricane-force winds on April 10, 2010. Greenleaf is a 

calendar-year taxpayer and holds his timber for use in a trade or business. He maintains one merchantable timber account for all of his forest land, which consists of stands of planted pine of various ages. The 

severity of the damage differed from stand to stand. In some stands, 

nearly all the trees were uprooted and splintered. Parts of other stands 

were subject to windthrow, whereas the remaining stands suffered little 

damage.

Greenleaf instructed his consulting forester to cruise the affected stands 

and determine the extent of the damage. He used the cruise data and 

on-the-ground inspections to identify which stands were so severely 

damaged that they were inoperable and which should be treated with 

a salvage harvest. He put the stands identified for salvage up for sale in 

July, but received no offers by December 31. The timber buyers Greenleaf contacted all told him that, because of the large amount of timber 

damaged by the storm, there was more timber available than the market 

could absorb. They suggested he contact them the next spring.

Greenleaf claimed his basis in the 1,200 cords of timber in the inoperable 

stands as a casualty loss on his 2010 tax return. He determined his basis 

in the timber as shown in fig. 7.1. He reported the loss on IRS Forms 

4684, 4797, and 1040, Schedules D and C.

Example 7.11.—Integrated Example.

On November 10, 2011, Greenleaf was able to sell the stands identified for 

salvage in 2010. The consulting forester had estimated that these stands 

contained 2,100 cords of merchantable timber, but the buyer estimated 

they contained only 1,800 cords. The difference was because of degradation of the downed and damaged trees over the two summers after the 

storm. Greenleaf received $16,500 for the 1,800 cords. He determined his 

allowable basis for the sale as shown in fig. 7.2. The $1,233 loss (fig. 7.2, 

line 14) should be reported as a noncasualty loss in 2011. The $9,102 gain 

on the salvage sale ($16,500 sale proceeds – $7,398 depletion deduction) 

should be reported on IRS Form T (Timber), Part III.

If Greenleaf elects to recognize the gain from the salvage sale, he would 

report it on IRS Form 4797. If he elects to postpone recognition of the 

gain by replanting the stands or otherwise acquiring qualifying replacement property, as discussed previously, he would attach a statement to 

his 2011 tax return detailing the facts relating to the storm, the amount 

realized on the salvage sale, his computation of the gain, any gain to be 

reported, and the type and cost of replacement property acquired. If the 

replacement property was to be acquired after the due date for his 2011 

tax return, Greenleaf should indicate in the statement that he intends to 

acquire replacement property within the required time period. In the year 

he acquires the replacement property, he would attach a statement to his 

tax return giving detailed information on the replacement property.
Forest Landowners’ Guide to the Federal Income Tax 65

Figure 7.1.—IRS Form T (Timber), Part II: Timber Depletion.
66 Forest Landowners’ Guide to the Federal Income Tax

Figure 7.2.—IRS Form T (Timber), Part II: Timber Depletion.
Forest Landowners’ Guide to the Federal Income Tax 67

Forest landowners derive many benefits from their property. 

You may have a special interest in providing wildlife habitat, 

conserving soil and water, protecting endangered plants and 

animals, or other activities not related to the production of 

income. Such activities may increase the market value of the 

property. Forest stewardship simply refers to management of 

forest land to protect, restore, or enhance all forest resources. 

Tax law may be of benefit in these efforts. You need to be 

aware, however, that current tax laws may not support all of 

your efforts. This chapter discusses the basic tax incentives for 

wise stewardship of forest land.

Treatment of Management 

Expenses Keyed to Production of 

Income

Tax law is keyed to the production of income. In general, expenses incurred for an activity carried out to produce income 

as either a trade or business or an investment can be recovered, 

as discussed in chapter 4. A critical factor is that the expense 

incurred for an activity must be directly related to its potential to produce income. Even if you may expect to sell timber 

sometime during your life, timber production may not be the 

primary factor motivating your activities. Note, however, that 

whether or not you manage your forest land for the production 

of income, if you itemize deductions, you can include the property tax paid on your forest land under “Taxes You Paid,” on 

Internal Revenue Service (IRS) Form 1040, Schedule A.

You may have a special interest in wildlife and manage your 

forest land to attract certain species. In some cases, wildlife 

management activities—such as planting food plots and shrubs 

for food and cover or maintaining a timber species and stocking mix to favor certain species—may be related to the production of income if your land is leased for hunting. In other cases, 

expenditures for these activities may be made strictly to increase your enjoyment of the property. To claim your management costs as a deductible expense for tax purposes, you need 

to manage your property so that your activities do not bring 

into question your intention to eventually make a profit from 

the property, as discussed in chapter 4.

In many instances, it is possible to carry out wildlife habitat 

management activities as part of your timber management 

program and receive income from both activities. Your wildlife 

management expenses may be incidental to your timber management activities. In this case, the expenses could be treated 

as timber management expenses. If, however, wildlife management activities dominate your forest management program and 

you do not receive any income related to wildlife, the expenses 

may not qualify as ordinary and necessary business or investment expenses. But in some cases, the expenses might qualify 

to be added to the basis of your property, as discussed in chapter 4.

Capital Costs Recovered When Property 

Is Sold or Subject to Casualty Loss

Whether or not you are managing your forest land to produce 

current income, it would be to your advantage to keep records of 

amounts you spend for capital improvements. You should record 

the basis of your land and timber, as discussed in chapter 4. If 

you make permanent improvements to the land, such as construction of roads and ponds, the improvements would increase 

the basis of your land. You cannot, however, claim depreciation 

deductions on depreciable land improvements, such as drainage structures, unless you are managing for the production of 

income. Your basis in the land would be used to determine your 

taxable gain if you ever sold the land in whole or in part. You 

also could recover your basis in the timber if you sold it with 

the land or had a timber sale, as discussed in chapter 5.

Capital Gains Treatment Applies

Income from the sale of your land and/or timber would qualify 

as a capital gain, whether or not you manage your forest land 

for the production of income. The lower capital gains tax rate 

for noncorporate taxpayers would apply to the net gain—the 

sales revenue, minus the basis in the land or the timber sold.

Estate Planning

Many of the best opportunities to promote stewardship with 

your forest land are associated with estate planning. This topic 

is the focus of a companion publication, Estate Planning for 

Forest Landowners: What Will Become of Your Timberland?

(USDA Forest Service Southern Research Station General 

Technical Report SRS-112). One such opportunity, conservation easements, is discussed here because of its potential to 

significantly increase long-term stewardship.

Chapter 8. Tax Implications of Forest Stewardship
68 Forest Landowners’ Guide to the Federal Income Tax

Conservation Easements

If you are highly motivated to engage in activities that improve 

the conservation and ecological value of your forest land and 

want to guarantee that it will remain as forest land in perpetuity, it may be in your best interest to sell, donate, or otherwise 

transfer all or part of your ownership interest in the property 

to an organization specializing in the management of forest 

and other lands for conservation purposes. Your options are 

not limited to the outright transfer of your entire ownership 

interest. You can legally transfer less than your entire interest. 

For example, you can transfer a restriction on the use of the 

property for purposes other than forest land, such as housing, 

commercial, or industrial development. You could transfer this 

restriction and retain the right to live on, produce timber, and 

otherwise continue your enjoyment of your property. These 

types of agreements generally are referred to as conservation 

easements or private conservation contracts.

Such transfers are a way for you to control the use of the land 

during and after your lifetime. By selling a restriction, you 

would in effect get income from the development rights without 

having to sell the property as a whole. This would be taxable 

income. By donating the restriction (in perpetuity) to a qualifying organization, you may qualify for a charitable deduction 

on your income tax return. For additional information on this 

topic, you may want to read Preserving Family Lands: Essential Tax Strategies for the Landowner by Stephen J. Small, 75 

Federal Street, Boston, MA 02110-1913. The National Land 

Trust Alliance (http://www.lta.org/) or local land trusts also are 

excellent sources of information.

Qualifications for Charitable Deduction of 

Conservation Easements

Under some circumstances, a donation of a restriction on the 

development of your forest land may qualify as a charitable 

contribution. The charitable contribution deduction may apply 

to your income, estate, or gift tax liability. The criteria necessary to qualify for a charitable deduction need to be carefully 

evaluated. These criteria are discussed in IRS Publication 526, 

Charitable Contributions. You should seek legal counsel to 

facilitate the process. Three basic criteria must be considered.

Qualified Organization. Your contribution must be made to 

one of the following types of qualified organizations:

1. A unit of the local, State, or Federal government;

2. A publicly supported charitable, religious, scientific, 

educational, or similar qualified organization; or

3. An organization that is controlled by, and operated for, 

the exclusive benefit of a government unit or a publicly 

supported charity.

Conservation Purpose. Your contribution must be made solely 

for one or more of the following purposes:

1. Preservation of land areas for outdoor recreation by, or for 

the education of, the general public;

2. Protection of a relatively natural habitat for fish, wildlife, 

plants, or a similar ecosystem;

3. Preservation of open space, including farmland and forest 

land. The preservation must yield a significant public 

benefit. It must either be for the scenic enjoyment of the 

general public or under a clearly defined Federal, State, or 

local government conservation policy; or

4. Preservation of a historically important land area or a 

certified historic structure.

Qualified Real Property Interest. Any of the following interests in real property qualify. Forest land and associated timber 

are real property:

1. Your entire interest in real estate other than a mineral 

interest;

2. A remainder interest—that is, the interest that remains after 

an interest that you hold for a time period, which either is 

designated or is fixed by an identifiable event, such as your 

death—expires; or

3. A perpetual restriction on how the property may be used.

Valuation of Donation

The value of a donation of a conservation easement generally 

is equal to the value of the entire property before the donation, 

minus its value after the donation, as discussed in IRS Publication 561, Determining the Value of Donated Property. The best 

evidence of this difference in value often is sales of similar 

properties in the area that were bought and sold, some without 

any restrictions and some with restrictions similar to those you 

are considering for your property. The basic principle is demonstrated in Example 8.1.

Because of the need for accuracy, a professional appraiser 

should be used to determine the value of your donation. If you 

claim a deduction of more than $5,000 for donated property, 

you must get a qualified written appraisal made by a qualified appraiser in addition to filing the information required 

on claimed deductions of more than $500. You must attach 

an appraisal summary (Section B, Part III of IRS Form 8283: 
Forest Landowners’ Guide to the Federal Income Tax 69

Noncash Charitable Contributions) to your income tax return. 

The amount of deduction you claim may be subject to other 

restrictions, as discussed in IRS Publication 526, Charitable 

Contributions.

Estate Tax Exclusion for Land Subject to 

a Qualified Conservation Easement

A percentage of the value of land subject to a qualified conservation easement may be excluded from the gross estate of 

a decedent. The applicable percentage that can be excluded is 

limited to 40 percent of the value of the land subject to the easement, but it is reduced by 2 percentage points for each percentage point that the value of the qualified easement is less than 

30 percent of the value of the land before the easement. This 

means that if the value of the easement is less than 10 percent 

of the value of the land before the easement, the applicable 

percentage will be zero. The maximum amount that can be excluded is $500,000.

The decedent’s basis in land for which the exclusion is used 

carries over to the heirs; there is no step-up in value.

To qualify, the land must be located in the United States or in a 

U.S. possession. The land must have been owned by the decedent 

or a member of the decedent’s family during the 3 years ending 

with the decedent’s date of death. The land must be subject to 

a qualified conservation easement granted by the decedent, a 

member of the decedent’s family, or the trustee of a trust that 

holds the land. In addition, land subject to a qualified easement 

granted after the death of the decedent by the executor of the 

estate may qualify.

For additional information see the instructions for Schedule U 

of IRS Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return, available at http://www.irs.gov/pub/

irs-pdf/i706.pdf.

You own 300 acres of forest land. Similar land in the area has a fair 

market value (FMV) of $5,000 per acre. Land in the general area 

that is restricted solely to forestry uses consistent with the county’s 

open-space program, however, has a FMV of $2,000 per acre. Your 

county wants to preserve green space in the area of your property 

and prevent further development. The county is most interested 

in preserving the 200 of your acres that are visible from a major 

highway. You grant the county an enforceable open-space easement 

in perpetuity on the 200 visible acres, restricting its use to selective 

timber harvesting consistent with the open-space easement. The 

value of the easement is:

FMV of the property before granting the easement:

 $5,000 x 300 acres .................................................. $ 1,500,000

Less FMV of the property after granting the easement:

 [($5,000 x 100 acres) + ($2,000 x 200 acres)]........... – 900,000

Value of the easement ................................................. $ 600,000

Example 8.1.—Value of a Donated Conservation Easement.
70 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 71

Chapter 9. Other Tax Considerations

Installment Sales

Introduction

It may be to your advantage to receive at least one payment 

from the outright sale of timber after the tax year in which the 

disposition occurs. This type of sale is called an installment, 

or deferred payment, sale. The installment sale provisions apply automatically whenever at least one payment is received in 

a tax year after the tax year of the sale. Under the installment 

method, gain from the sale is prorated and recognized over the 

years in which payments are received.

An installment sale is the only way to spread the tax burden 

from a lump-sum timber sale over more than 1 tax year. The 

installment sale provisions also may be beneficial if you sell 

forest land. If your activities are subject to the passive loss 

rules (chapter 4), and you sell forest land and/or timber, special 

rules will apply. These rules are discussed in detail in Internal 

Revenue Service (IRS) Publication 925, Passive Activity and 

At-Risk Rules. Although use of the installment method determines when gain from the sale is reported, it does not affect the 

characterization of the gain as capital gain or ordinary income.

The receipt of payments in more than 1 tax year could arise 

from either a lump-sum or a pay-as-cut timber contract. For 

example, a lump-sum sale might require payment in full before 

cutting starts, or an initial down payment with periodic payments thereafter. A typical pay-as-cut contract might require 

an initial advance payment and monthly payments thereafter 

based on the volume cut and scaled during the previous month. 

As discussed in the following paragraph, however, pay-as-cut 

contracts that qualify for treatment under section 631(b) of the 

Internal Revenue Code (IRC), as discussed in chapter 5, are not 

treated as installment contracts. These payments are taxable 

income subject to capital gains treatment under IRC section 

631(b).

There are other limitations on the use of the installment sale 

method that you should be aware of. Although forest landowners classified as investors (chapters 4 and 12) who sell standing 

timber will qualify, the method generally does not apply to dispositions of real property held primarily for sale to customers. 

An exception to this rule, however, permits installment sales to 

be used for this category of standing timber if the seller’s timber ownership qualifies as a farm business under section 2032A

of the IRC. The term farm in section 2032A includes forest 

land. Nevertheless, taxpayers using this exception to make an 

installment sale must sell their timber using a lump-sum contract. A pay-as-cut disposal with a retained economic interest

will not qualify; in that case the IRC section 631(b) rules apply 

as discussed in chapter 5.

In addition, the installment sale provisions do not apply to rent 

received from a forest land lease. Nor do the provisions apply 

to sales resulting in a loss. Losses must be reported in full in 

the year incurred. If a transaction qualifies, the installment sale 

provisions, as noted previously, apply automatically whenever 

at least one payment is received in a tax year after the tax year 

of the sale. You may, however, elect out of the installment sale 

provisions by reporting the full fair market value (FMV) of the 

contract in the year of the sale, as discussed in more detail under “Electing Out,” later in this chapter.

Escrow Accounts. In some cases, the sales agreement, or a later 

escrow agreement, may call for the buyer to establish an irrevocable escrow account out of which some, or all, of the remaining installment payments, including interest as discussed below, 

are to be made. An escrow account is irrevocable if the buyer 

cannot revoke it and recall the funds to his own use. In general, 

this type of sale cannot be reported on the installment method. 

The buyer’s obligation is paid in full when the balance of the 

purchase price is deposited into the escrow account. Thus, after 

the escrow account is established, the seller no longer relies on 

the buyer for the remaining payments but instead relies on the 

escrow arrangement.

If an escrow arrangement imposes a substantial restriction on 

the seller’s right to immediately receive the sale proceeds, the 

sale may be reported on the installment method if it otherwise 

qualifies. For an escrow arrangement to impose a substantial 

restriction, however, it must serve a bona fide purpose of the 

buyer. This means that a real and definite restriction is placed 

on the seller or a specific economic benefit conferred on the 

buyer. Because of the nature of most timber sale transactions, 

irrevocable escrow accounts usually will preclude installment 

reporting.

Sale Price

The selling price for a timber sale is the entire cost of the timber to the buyer. It includes all money and the FMV of any 

property the seller receives from the buyer. It also includes 
72 Forest Landowners’ Guide to the Federal Income Tax

any debt associated with the sold timber that the buyer pays or 

assumes. Debt could be a note, mortgage, or other liability—

such as a lien, accrued interest, or taxes owed on the timber. If 

the buyer pays any of the seller’s sales expenses, that amount 

is also included in the selling price. Each installment payment 

of the timber sale price usually consists of two primary parts: 

(1) return of investment (basis) in the timber sold and (2) gross 

gain. Gross gain, in turn, usually is apportioned between interest and net gain.

Basis

The allowable basis for timber sold in an installment sale is 

determined in the usual way by multiplying the appropriate 

depletion unit by the number of units sold as explained more 

fully in chapter 5, “Determining the Amount of Gain or Loss.” 

The expenses incurred in selling the timber are added to the 

allowable basis and the total is called the adjusted allowable 

basis. This total is subtracted from the sale price; the difference 

is the gross gain on the sale.

Gross Gain

The percentage of an installment payment that is gross gain 

usually remains the same for each payment. The gross gain to 

be reported each year that a payment is received is determined 

by calculating the gross profit percentage. In the absence of 

any recapture, gross profit percentage is calculated by dividing 

the gross gain from the sale by the contract price. Example 9.1 

shows how to calculate gross profit percentage. When the gross 

gain is reported each year, it is apportioned between capital 

gain and interest (ordinary income) as discussed in more detail 

later in this section.

In general, if the selling price is reduced for any reason at a 

later date, the gross profit percentage must be recalculated. The 

new gross profit percentage is then applied to any remaining 

payments. The gross gain left to be reported is spread evenly 

over the remaining installments. You cannot go back and refigure the gross gain you reported in previous years.

Interest. If the note or other document of indebtedness received from the buyer does not provide for interest on the 

deferred payments, or provides for inadequate interest as defined in the IRS regulations, imputed interest is required to be 

calculated if some or all of the scheduled payments are due 

more than 6 months after the date of the sale under a contract 

in which some or all of the payments are due more than 1 year 

after the date of the sale. Imputed interest calculation is not required, however, if the total sale price does not exceed $3,000. 

IRS Publication 537, Installment Sales, provides the necessary 

information for determining imputed interest.

Capital Gain. That portion of the timber sale gross gain that is 

not attributable to interest will be a long-term capital gain if the 

timber was held for more than 1 year. If the timber was held for 

1 year or less, it will be a short-term capital gain if the timber is 

investment property. If IRC section 631(b) is required for capital gains treatment it will be ordinary income.

Sales to Related Parties

If an installment sale is made to a related party, who then 

makes a second disposition of the property within 2 years of the 

first sale and before all payments are made under the first sale, 

a special rule comes into effect. In this situation, the amount 

realized by the related person from the second sale is treated 

as being received by the initial seller at the time of the second 

sale. A related person for this purpose includes the seller’s 

spouse, child, grandchild, parent, grandparent, brother, sister, 

controlled corporation, partnership, trust, and estate. See IRS 

Publication 537 for details.

Reporting Installment Sales

Installment sales are reported on IRS Form 6252: Installment 

Sale Income. This form is used to report the original sale in the 

year that it takes place and also to report payments received 

in later years. In addition, the sale should be reported on IRS 

Form T (Timber), if required (Example 5.1), but only in the 

year that it takes place.

Electing Out

The seller can elect not to have the installment sale rules apply 

to the sale. If this election is made, the entire gain from the sale 

is reported on the return for the year of the sale, even though 

not all of the selling price will be received that year. The election is made by not reporting the sale on IRS Form 6252. 

Instead, it is reported on IRS Form 1040, Schedule D, if the 

timber was held as an investment or on IRS Form 4797 if the 

timber was held for use in a trade or business.

You sell standing timber at a contract price of $10,000. The allowable basis of the sold timber is $2,000 and timber sale expenses 

are $500. The total gross gain on the sale is $7,500 ($10,000 – 

$2,000 – $500). The gross profit percentage is 75 percent ($7,500 

÷ $10,000).

Example 9.1.—Calculation of Gross Profit Percentage.
Forest Landowners’ Guide to the Federal Income Tax 73

Alternative Minimum Tax

The purpose of the alternative minimum tax (AMT) for individuals is to make certain that if a person’s regular income tax 

is reduced to a certain level because of specified tax benefits 

(termed tax preference items), at least a minimum amount of 

income tax will be paid. AMT is only owed if what is called 

the tentative minimum tax (TMT), which generally is the tax 

computed on taxable income as determined without the specified tax benefits, exceeds the regular tax, as computed with 

the benefits.

While not discussed here, corporations also are subject to the 

AMT—although an exemption exists for certain small corporations. The AMT calculations for individuals are made on IRS 

Form 6251: Alternative Minimum Tax—Individuals.

Potential Liability for the AMT

Your potential liability for the AMT depends on the structure of 

your timber activities, your other sources of income and losses, 

and the tax preference items that you claim.

Timber Sales. Capital gains on timber sales or disposals do 

not generate a tax preference subject to the AMT—nor does 

deducting the allowable basis for the sale or disposal of standing timber or taking a depletion deduction for timber that you 

cut. Note that the discussion in the IRS Form 6251 instructions 

regarding adjustments to depletion deductions, and adjustments 

to gain or loss, does not apply to timber depletion or basis 

deductions—nor to gains and losses resulting from a sale or 

disposition of timber. Timber income, however, may increase 

total taxable income sufficiently to indirectly trigger an AMT 

liability because of tax preference items that become applicable 

at the higher income level. This could result if income is increased to greater than the specified AMT exemption amounts, 

which are discussed in the following section.

Forest Management Costs. Deduction of forest management 

expenses may trigger an AMT liability. This could occur if the 

expenses are recovered as miscellaneous itemized deductions 

on IRS Form 1040, Schedule A, discussed in chapter 4, “Timber Held as an Investment.”

Other Considerations. If you are not materially participating

in the conduct of your timber business, as discussed in chapter 4, a passive activity gain or loss generated by your timber 

activity must be recomputed for AMT purposes by taking into 

account the AMT adjustments and preferences. Also, AMT liability could result if (1) you have an allowable AMT loss that 

is less than the allowable regular tax loss, (2) you have a regular tax gain that is less than your AMT gain, or (3) you have 

an allowable loss for regular tax purposes but a gain for AMT 

purposes. For additional information on these items, see the 

instructions for IRS Form 6251.

The Need To File IRS Form 6251. A worksheet in the instructions for IRS Form 1040: U.S. Individual Income Tax Return

will alert you to the potential need for filing IRS Form 6251. 

The IRS Web site also contains an electronic “AMT Assistant” 

to help you make this determination online. If it appears that the 

form must be filed, refer to the form instructions for completing 

it. Commercial tax preparation software also makes the AMT 

calculation if necessary.

Alternative Minimum Taxable Income

To calculate the AMT, it is first necessary to determine alternative minimum taxable income (AMTI). It is through this figure 

that excessive tax savings are recaptured. The base for computing AMTI is your regular taxable income calculated with all 

applicable AMT adjustments and preferences included. For this 

purpose, AMT adjustments and preferences are those income 

and deduction items that are treated differently (generally more 

favorably) in computing regular taxable income than the way 

in which they are treated in computing AMTI. These items are 

then excluded to determine AMTI.

For example, the standard deduction and personal exemptions 

allowed in calculating regular taxable income are not allowed in 

calculating AMTI. If you itemize your deductions, medical expenses not compensated for by insurance are deductible in computing regular taxable income to the extent that they exceed 7.5 

percent of adjusted gross income (AGI). In computing AMTI, 

however, medical expenses not compensated for by insurance 

are deductible only to the extent that they exceed 10 percent 

of AGI. State income taxes and property taxes that are deductible when computing regular taxable income are not deductible 

when computing AMTI. Also, in determining AMTI, miscellaneous itemized deductions are not allowed.

For depreciable property placed in service after 1998, if the 

200-percent declining balance method is used for regular tax 

purposes for 3-, 5-, 7-, or 10-year property, then the 150 percent 

declining balance method and regular tax depreciation period 

must be used for AMTI purposes for these items. For all other 

depreciable property placed in service after 1998, no AMTI 

adjustment is required, as AMT and regular tax depreciation are 

identical. In addition, AMTI adjustments are required for certain depreciable property placed in service before 1998.
74 Forest Landowners’ Guide to the Federal Income Tax

Adjustments (that is, less favorable treatment in computing 

AMTI) also exist for tax shelter farm losses, incentive stock 

options, and certain types of tax-exempt interest. As well, an 

alternative tax net operating loss deduction is used in calculating AMTI in lieu of the regular tax net operating loss deduction. For a complete list of AMT adjustments and preferences, 

and the manner in which they are computed, consult IRS Form 

6251 and its instructions.

Social Security Self-Employment 

Tax

You may owe self-employment tax if you are engaged in a 

timber trade or business as a sole proprietor, independent 

contractor, or member of a partnership or limited liability company. This tax is used to provide Social Security and Medicare 

coverage to self-employed taxpayers. The tax is imposed on 

net earnings from self-employment, which includes earnings 

derived by an individual from a trade or business, less all business deductions allowed for income tax purposes. You must pay 

self-employment tax if you have net earnings for the year from 

self-employment of $400 or more.

The self-employment tax of 15.3 percent is composed of two 

parts—12.4-percent Social Security tax, plus 2.9-percent 

Medicare tax (the 2010 Tax Relief Act reduced the Social Security tax paid by employees and self-employed individuals by 

2 percentage points for 2011; the Temporary Payroll Tax Cut 

Continuation Act of 2011 (P.L. 112-78) and Middle Class Tax 

Relief and Job Creation Act of 2012 (P.L. 112-96) extended 

the reduction through the end of 2012). Net earnings from 

self-employment up to $110,100 (for 2012) are subject to the 

Social Security portion of the tax. If you also earn wages as an 

employee in 2012 that are subject to the Social Security tax, 

this tax will apply only to the first $110,100 of your combined 

wages and net earnings from self-employment. All net earnings 

without limit from self-employment, however, are subject to 

the Medicare portion of the self-employment tax. You are not 

exempt from the self-employment tax if you are receiving Social Security benefits, are fully insured under Social Security, or 

are not otherwise required to file an income tax return. Nor are 

you exempt on account of age.

If income from timber operations is considered as received in 

the course of a trade or business, it may be subject to the selfemployment tax, even if the timber transactions are infrequent 

and the taxpayer is primarily engaged in some other business 

or profession. For example, a farmer whose property includes 

a tract of timber, or a person employed in the city who owns 

forest land outside the city, who occasionally cuts timber for 

firewood and sells it may be liable for self-employment tax on 

the income received.

Treatment of Spouses

If you are a sole proprietor of a trade or business and your 

spouse works for you, he or she may be your employee. 

The treatment of employees for employment tax purposes is 

explained in the “Employment Status” section later in this 

chapter. If, however, you and your spouse join together in the 

conduct of a business and share in its profits and losses, a partnership may have been created (see, however, “Qualified Joint 

Ventures,” immediately following). If so, you and your spouse 

should report the business income on a partnership return, 

IRS Form 1065: U.S. Return of Partnership Income. Separate 

Schedules K-1 should be attached to the Form 1065, to show 

each spouse’s share of the net income. Separate Schedules SE 

of IRS Form 1040 also should be filed to report each spouse’s 

self-employment tax.

Qualified Joint Ventures. For tax years beginning after 

December 31, 2006, spouses who join together to conduct a 

qualified joint venture and who file a joint Federal tax return 

can elect to be treated as two sole proprietorships rather than a 

partnership for Federal income tax purposes. A qualified joint 

venture is any joint activity involving the conduct of a trade or 

business, if (1) the husband and wife are the only members of 

the joint venture, (2) each spouse qualifies as a material participant in the trade or business according to the passive activity 

loss rules, without regard to the rule that treats participation by 

one spouse as participation by the other (see chapter 4, “The 

Passive Loss Rules), and (3) both spouses elect for the provision to apply. If the spouses make the election, then all items of 

income, gain, loss, deduction, and credit are divided between 

them according their interests in the venture; each files his or 

her own business and self-employment tax forms; and each 

receives individual credit for paying Social Security and Medicare taxes. Under IRS guidance issued December 11, 2011, 

spouses can make the election by filing a joint IRS Form 1040: 

U.S. Individual Tax Return, with all items of income, gain, 

loss, deduction, and credit divided between them according to 

their respective interests in the joint venture, and each filing a 

separate IRS Form 1040, Schedule C, and if required, an IRS 

Form 1040, Schedule SE. If the spouses qualify as farmers, 

each should file a separate IRS Form 1040, Schedule F, and 

IRS Form 4835: Farm Rental Income and Expenses instead of a 

Form 1040, Schedule C.
Forest Landowners’ Guide to the Federal Income Tax 75

Excluded Income

The following timber-related items are not included in computing net earnings from self-employment:

1. Rental payments: Payments received for the use of real 

estate, and for personal property leased with real estate, if 

the recipient is not a real estate dealer and does not provide 

substantial services with respect to the rental activity. Rental 

payments for leasing timberland for hunting generally are 

excluded unless the owner provides lodging, guiding, and 

other services.

2. Gains that qualify for capital gain treatment: Gains from the 

sale or other disposal of standing timber generally qualify 

as capital gains if the timber is not held primarily for sale 

to customers in the ordinary course of a trade or business, 

or if it is disposed of under the provisions of IRC section 

631(b) as discussed in chapter 5. If you cut timber yourself 

or have a contract logger cut it for you, and you elect to 

treat the cutting as a sale under the provisions of IRC 

section 631(a)—again as discussed in chapter 5—the gain 

so determined also would not be included in net income 

from self-employment. The profit on the sale of the logs or 

manufactured products, however, may be subject to the selfemployment tax.

Other Considerations

Christmas Tree Growers. Growers of Christmas trees are subject to the rules applicable to timber producers in general. The 

self-employment tax applies to ordinary income received from 

the sale of the trees. Gains from the sale of Christmas trees, 

however, may qualify as capital gains as discussed in chapter 5 

and therefore not be subject to the self-employment tax.

Other Forest Products. The sale of forest products other than 

standing timber generally produces ordinary income, as discussed in chapters 5 and 11. Net receipts from these products, 

thus, are included in self-employment income.

Cost-Sharing Payments. Net payments received under Federal cost-sharing programs, as well as those received under 

certain State cost-sharing programs, are included in self-employment income if the activity is considered a business, unless 

the payments meet the requirements under IRC section 126 to 

be excluded from reportable income for Federal income tax 

purposes, and the taxpayer makes a specific election to exclude 

them. Part or all of such payments may qualify for exclusion 

under the rules discussed in chapter 5, “Government Program 

Payments.” Only the amount actually excluded from gross income may be ignored for self-employment income purposes.

Conservation Reserve Program Rental Payments. USDA 

Conservation Reserve Program (CRP) cost-sharing payments 

fall under the rules discussed in the immediately preceding 

paragraph (see the summary of Revenue Ruling 2003-59, appendix A). CRP annual rental payments, however, are subject 

to the self-employment tax, whether the recipient qualifies or 

does not qualify as a material participant in their farm operation. This position is based on a two-fold rationale: first, that the 

activities required to fulfill a CRP rental contract—including 

but not limited to tilling, seeding, fertilizing, and weed control—themselves meet the continuity and regularity of activity 

requirements for participation in a trade or business, and second, that CRP rental payments are not land rental payments in 

the usual sense of the words and cannot be excluded from net 

income from self-employment under IRC section 1402(a)(1) 

as rentals from real estate (see IRS Notice 2006-108 for more 

information).

How To Calculate Self-Employment Tax

The self-employment tax is calculated by completing IRS 

Form 1040, Schedule SE: Computation of Social Security 

Self-Employment Tax. If you work as an employee and earn 

wages or salary subject to withholding that equals or exceeds 

the maximum amount subject to the Social Security portion of 

the self-employment tax, and also have income from a trade or 

business, you do not pay Social Security tax on your earnings 

from the trade or business. If you earn wages subject to withholding that total less than the maximum amount, however, 

and also have income from timber operations subject to the 

self-employment tax, the net timber income will be taxed to the 

extent of the difference between your wages and the maximum 

amount. In addition, all self-employment income is subject to 

the Medicare tax.

Including Timber Gains in SelfEmployment Income To Guarantee 

Benefits

Qualification for Social Security benefits for you or your dependents depends in part on how much Social Security and/or 

self-employment tax you have paid. For example, certain public 

employees and some school teachers do not pay Social Security tax. If you are not certain about whether you will qualify 

for full benefits on retirement, you can check your status by 

contacting the Social Security Administration office listed in 

your telephone book under “United States Government, Social 

Security Administration,” or online at http://www.ssa.gov/. You 

also should be able to make this determination from the annual 

report you receive from the Social Security Administration.
76 Forest Landowners’ Guide to the Federal Income Tax

If you need to make additional contributions to obtain full benefits, you may prefer not to elect under IRC section 631(a) to 

treat the cutting of timber as a sale. In this situation, if you are a 

farmer who cuts and sells timber, report your timber income and 

expenses—and the basis of the timber cut—on IRS Form 1040, 

Schedule F. Such income would then be ordinary income and not 

a capital gain. As such it would be subject to the self-employment 

tax and would be reported on IRS Form 1040, Schedule SE. Remember, however, that if you have made a section 631(a) election

in a prior year you generally may not forgo the election in any 

following year without permission from the Commissioner of 

Internal Revenue. Two one-time exceptions to this rule, however, 

are described in chapter 5, “IRC Section 631(a) Cutting of Standing Timber With an Election to Treat as a Sale.”

If you dispose of standing timber held primarily for sale to customers in the ordinary course of a trade or business, in general, 

the gain will be ordinary income subject to the self-employment tax unless you dispose of it in such a way that the provisions of IRC section 631(b) apply, as discussed in chapter 5.

If timber is not held primarily for sale, and it is sold “on the 

stump” (lump-sum sale), the gain usually is a capital gain and 

thus is not subject to the self-employment tax. Capital gains 

cannot be reported as self-employment income simply to receive Social Security credit.

For more information on the self-employment tax, see the “Instructions for Schedule SE (Form 1040)” and IRS Publication 

334, Tax Guide for Small Business. If you are a farmer, also see 

IRS Publication 225, Farmer’s Tax Guide.

Employment Status

If you hire an individual to do work on your forest property, 

that person may be your employee. If so, as an employer you 

have several tax responsibilities. Most employers must withhold, deposit, report, and pay the following employment taxes:

1. Income tax withheld from an employee’s wages.

2. Social Security and Medicare taxes (both employer and 

employee portion). The employee’s portion is withheld from 

the employee’s wages by the employer.

3. Federal unemployment tax (FUTA). FUTA is paid by the 

employer, but not withheld from the employee’s wages. This 

tax is coordinated with any State unemployment tax paid.

An IRS Form W-2: Wage and Tax Statement, which shows 

wages paid and taxes withheld during the past year, must be 

prepared by the employer at the end of each year. Copies are 

sent to the Social Security Administration and to the employee. 

IRS Publication 15, (Circular E), Employer’s Tax Guide, provides information concerning an employer’s tax responsibilities. You also should check with your State regarding any State 

income and unemployment tax requirements.

Employee Status Determination

An individual is an employee for Federal employment purposes 

if he or she has the status of an employee under the commonlaw rules applicable in determining an employer-employee 

relationship. In general, the relationship of employer and employee exists when the person for whom the services are being 

performed has the right to control and direct the individual 

who performs the services—not only as to the result to be accomplished by the work, but also as to the details and means 

by which that result is to be met. In other words, an employee 

is subject to the will and control of the employer, not only as 

to what is to be done, but also as to how it is to be done. It is 

not necessary that the employer actually direct or control the 

manner in which services are performed—it is sufficient if the 

employer merely has the right to do so. Independent contractors 

are not subject to this right of control and direction.

If the tests for defining an employee are met, it does not matter 

that the person performing the services is designated as anything other than an employee—or how the payments are measured or paid, or what they are called. Therefore, it is irrelevant 

if a bona fide employee is called an independent contractor, a 

partner, or an agent.

The 20 Factor Test

The IRS has developed a set of 20 factors to use as a guide in 

determining whether a worker is an employee or an independent contractor. These factors are described and discussed in 

IRS Publication 15-A, Employer’s Supplemental Tax Guide. 

Reviewing them can help ascertain whether sufficient control 

is present to establish an employer-employee relationship. The 

factors should be used with caution, however. The degree of 

importance of each factor varies, depending on occupation and 

the factual context under which services are performed. The 

factors are grouped into three categories.

Behavioral Control. Facts that show whether the person for 

whom the services are being performed has a right to direct and 

control how the worker does the task for which hired. These facts 

include, among others, the type and degree of the following:

1. Instructions given to the worker: An employee generally 

is subject to instructions about when, where, and how to 
Forest Landowners’ Guide to the Federal Income Tax 77

work. Even if no instructions are given, sufficient behavioral 

control may exist if the person doing the hiring has the right 

to control how the work is done.

2. Training given to the worker: An employee may be trained 

to perform services in a particular manner. Independent 

contractors ordinarily use their own methods.

Financial Control. Facts that show whether the person or 

business doing the hiring has a right to control the business 

aspects of the worker’s job. These facts, among others, include 

the following:

1. The extent to which the worker has unreimbursed business 

expenses: Independent contractors are more likely than 

employees to have unreimbursed business expenses. Fixed 

ongoing costs that are incurred regardless of whether work 

currently is being performed are especially important. 

Employees also may incur unreimbursed expenses in 

connection with the services they perform, however.

2. The extent of the worker’s investment: An independent 

contractor often has a significant investment in the facilities 

and equipment he or she uses in performing services for 

someone else. A significant investment is not necessarily 

required, however, to be termed an independent contractor.

3. The extent to which the worker makes his or her services 

available to other businesses or individuals in the relevant 

market.

4. How the worker is paid: An employee generally is paid by 

the hour, week, or month. An independent contractor usually 

is paid by the job. It is common in some professions, such as 

consulting forestry, however, to pay independent contractors 

hourly.

5. The extent to which the worker can realize a profit or incur a 

loss: An independent contractor can make a profit or incur a 

loss.

Type of Relationship. Facts that show the type of relationship 

between the two parties, including the following:

1. Written contracts that describe the relationship the parties 

intend to create.

2. Whether or not the person or business doing the hiring 

provides the worker with employee-type benefits. Employeetype benefits may include insurance, a pension plan, vacation 

pay, and sick pay.

3. The permanency of the relationship. If the person for whom 

the services are being performed encourages a worker 

with the expectation that the relationship will continue 

indefinitely, rather than for a specific project or period of 

time, this generally is considered evidence of intent to create 

an employer-employee relationship.

4. The extent to which services performed by the worker are 

a key aspect of the regular business of the person doing the 

hiring. If a worker provides services that are a continuing 

and important component of the regular business activity of 

the person doing the hiring, it is more likely that person will 

have the right to direct and control the worker’s activities. 

If, for example, a consulting forestry firm hires a forester

to mark timber for its clients, it is likely that the firm will 

present the forester’s work as its own and would have the 

right to control or direct that work. This would indicate an 

employer-employer relationship.

Obtaining an IRS Ruling

If you pay a worker for services rendered on your forest land, 

and you are not certain whether the payee is an employee, you 

can obtain an IRS ruling on the question. This is done by filing 

IRS Form SS-8: Determination of Worker Status for Purposes 

of Federal Employment Tax and Income Tax Withholding.

Information Return Requirements

If a worker is determined to be an independent contractor and 

you make payments to that person aggregating $600 or more in 

a calendar year, you must file an information return—IRS Form 

1099-MISC—that shows the total amount paid. The return must 

be filed with the IRS by February 28 of the following year, with 

a copy to the payee by January 31 of that year.
78 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 79

Chapter 10. Christmas Tree Production

General Considerations

Christmas tree producers are subject to the same Federal income tax provisions as forest owners in general. There are several distinctions that you should be aware of, however. Unless 

stated otherwise in this discussion, the assumption is that the 

Christmas trees are more than 6 years old when cut and sold 

and, therefore, qualify as timber for income tax purposes.

Because of the nature of the activity, Christmas tree growing usually constitutes a business rather than an investment. 

Therefore, sections 631(a) and (b) of the Internal Revenue 

Code (IRC) are particularly relevant. Sections 631(a) and (b) 

and the regulations relating thereto (discussed and explained in 

chapter 5) provide that the term timber includes evergreen trees 

that are more than 6 years old at the time they are severed from 

their roots and sold for ornamental purposes. This definition 

includes Christmas trees.

It is possible, but unlikely, that a person who grows and sells 

standing Christmas trees on an occasional basis could be considered an investor as opposed to the owner-operator of a business. In that case, the rules for investors, instead of those for a 

business, as discussed in chapters 4 and 5, would apply.

Treatment of Costs

Establishment Costs

The general rule with respect to establishment costs, as discussed in chapter 4, is that all such costs—including replanting—are capital expenditures and must be capitalized to the 

timber account. This rule applies to Christmas trees exactly 

as it does to other timber, whether you use the cash method or 

the accrual method of accounting. The only exception is that 

Christmas trees do not qualify for the reforestation tax incentives under IRC section 194—deduction and amortization (see 

chapter 4, “Reforestation Tax Incentives”). All capitalized costs 

associated with Christmas trees, therefore, are recovered by 

deducting them at the time of cutting or sale, through timber 

depletion, unless recovered previously through casualty loss or 

involuntary conversion (chapter 7).

What if you plant trees with the intention of growing them for 

commercial timber production, take advantage of the reforestation tax incentives, and then later sell the trees as Christmas 

trees or balled nursery stock? If the trees are harvested or sold 

within 10 years, any tax saved by taking amortization deductions would be subject to recapture (see chapter 4, “Reforestation Tax Incentives”).

Operating Expenses and Carrying Charges

The rules for deducting timber-related operating expenses 

and carrying charges, as set out in chapter 4, apply as well to 

Christmas tree production if the trees in question are more than 

6 years old when cut or sold. The Internal Revenue Service 

(IRS) has specifically ruled that shearing and basal pruning 

costs are deductible business expenses (see the summary of 

Revenue Ruling (Rev. Rul.) 71-228, appendix A). Because 

growing Christmas trees is nearly always a business, the rules 

for deducting business costs are applicable. The passive loss 

rules also apply to everyone with an ownership interest in the 

Christmas tree farm. Only those who materially participate in 

the business can deduct current expenses against non-Christmas 

tree income, unless the passive owner has passive income to 

offset passive losses (see chapter 4, “The Passive Loss Rules”).

Uniform Capitalization Rules

Producers of Christmas trees that are 6 or fewer years of age 

when sold or cut are subject to the uniform capitalization rules 

with respect to operating expenses and carrying charges. These 

rules require that preproductive costs must be capitalized if the 

preproduction period of a crop is more than 2 years (see IRS 

Publication 538, Accounting Periods and Methods). The law, 

however, permits certain farmers to elect not to have the uniform 

capitalization rules apply. If this election is made (1) any gain on 

the sale of the crop is recaptured as ordinary income to the extent 

of the deductions permitted by the election, and (2) you must use 

the alternative depreciation system (straight line method) for all 

assets placed in service in any year for which the election is in effect. This election does not apply to Christmas tree growers who 

sell trees more than 2 years old but not more than 6 years old.
80 Forest Landowners’ Guide to the Federal Income Tax

Treatment of Income

Christmas Tree Sales Income

Income realized from the sale or cutting of Christmas trees is 

subject to the same rules as for other types of timber—both 

IRC section 631(a) and 631(b) apply (chapter 5). There are 

some unique aspects of Christmas tree production, however, 

that you should be aware of.

Outright Sale of Capital Asset. As mentioned previously, it 

is theoretically possible for an occasional producer of Christmas trees who sells the standing trees on a lump-sum basis to 

qualify for capital gains treatment as an investor under IRC 

section 1221 (see chapter 5, “Sale of Standing Timber for a 

Lump Sum”). In most situations, however, growers will be 

considered to be holding the Christmas trees primarily for sale 

to customers in the ordinary course of a trade or business, not 

as a section 1221 capital asset.

IRC Section 631(b). If capital gain treatment is desired for 

trees sold on the stump, you should use the provisions of IRC 

section 631(b). This means that a designated lot of trees could 

be sold for a lump sum amount, or sold based on a unit price 

and the number of units actually cut. In most cases of this kind, 

the unit of measurement would be either the individual tree or 

linear feet of tree height.

IRC Section 631(a). IRC section 631(a) will apply to most 

producers, particularly those who sell cut trees on the wholesale 

market. It makes no difference whether you cut the trees yourself or pay to have them cut. Reporting the cutting of Christmas 

trees as a sale under section 631(a) is done in exactly the same 

way as for other types of timber, as discussed in chapter 5. Section 631(a) requires that you determine, as of the first day of 

your tax year, the fair market value (FMV) of the uncut trees.

Making the Election. As noted in chapter 5, “IRC Section 

631(a) Cutting of Standing Timber With an Election to Treat as 

a Sale,” an IRC section 631(a) election is binding with respect 

to all timber cut and converted into products for sale in the year 

you make the election, and in all subsequent years. As well, 

your ability to revoke or reinstate a section 631(a) election is 

limited. You have considerable flexibility, however, in making 

the initial election. You are not required to make it in the year 

you first establish Christmas trees or even the year you first cut 

trees for sale. Also, making the election does not limit your options. You may, for example, cut Christmas trees for sale—or 

pay an operator to cut them for you—under a section 631(a) 

election and also dispose of standing Christmas trees under an 

IRC section 631(b)-type arrangement in the same year. Alternatively, you may sell standing trees lump-sum under section 

631(b) for a number of years, then begin cutting trees for sale 

on the wholesale market under section 631(a).

The Computation. Often the IRC section 631(a) FMV is calculated based on (1) the amount of linear footage harvested, times 

the value per foot or (2) the number of trees harvested, times 

the value per standing tree (see Example 10.1).

You are a calendar year taxpayer who established 5 Christmas tree 

plantations in 5 successive years, each comprising 10 acres and each 

containing 12,000 trees of a fast growing pine species. Two-year-old 

nursery stock was used, so the trees in the first plantation are now 

older than the minimum age (more than 6 years) required to qualify as 

timber under IRC section 631(a).

You spent $1,210 to establish the first plantation. Later, you incurred 

$1,060 in capital costs, representing (1) certain carrying charges you 

had elected to capitalize, and (2) the cost of replanting lost trees. The 

adjusted basis directly before the first cutting in November of that year 

thus amounted to $2,270 ($1,210 + $1,060). An inventory showed 

that 11,000 well-formed trees were now present. Of these, 6,000 were 

of sizes to be cut this year and 5,000 were to be left for further growth. 

A depletion unit of $0.21 per tree was derived by dividing the $2,270 

adjusted basis by the 11,000 trees.

You cut the 6,000 salable trees yourself and delivered them to a 

wholesaler. You received $4.30 per tree from the wholesaler. The total 

cost to you for cutting and delivering the trees was $1,800. You elect 

on your tax return to treat the cutting of the trees as a sale under section 631(a).

The value on January 1 can be estimated by discounting the value 

when cut for 10 months as follows. Assume the trees were worth 

Example 10.1.—Application of IRC Section 631(a) to Christmas Trees.

$3.60 each on November 1 when cut and that the applicable local 

interest rate (i) is 6 percent.

Value $3.60 per tree

[1 + (i ÷ 12)]10 = [1 + (0.06 ÷ 12)]10 = $3.42 per tree

You determine your taxable gain as follows:

Gain from cutting:

6,000 trees cut with an estimated FMV of $3.42 per tree

as of Jan. 1 ........................................................................ $ 20,520

Less depletion allowance of $0.21 per tree......................... – 1,260

Gain on timber (taxed as IRC section 1231 gain) ................ $ 19,260

Income on sale of trees:

6,000 trees sold for $4.30 per tree ..................................... $ 25,800

Less FMV of the trees sold (Jan. 1 value of $3.42 per tree) .... – 20,520

Less cost of cutting and delivery......................................... – 1,800

Income from harvesting and delivering (taxed as 

ordinary income)................................................................. $ 3,480
Forest Landowners’ Guide to the Federal Income Tax 81

Partnership Considerations. Two or more growers should be 

careful if they enter into an agreement to grow Christmas trees 

and harvest the trees themselves. If the agreement results in a 

partnership for tax purposes, a partnership return must be filed, 

and the IRC section 631(a) election must be made on the partnership return. An election on the individual returns of the partners is not a valid election (see, however, chapter 9, “Qualified 

Joint Ventures”).

Determination of Fair Market Value. Difficulty may arise in 

determining the FMV of Christmas trees on January 1 of the 

sale year. The value to be used should be your best estimate of 

what the trees could be sold for on the first day of the tax year, 

based on their condition on that date. Example 10.1 illustrates 

a recommended procedure for the computation of gains for a 

Christmas tree operation. Example 10.2 illustrates the tax treatment of trees sold on the stump to a jobber.

Choose and Cut Operations

“Choose and cut” Christmas tree sales typically do not qualify 

for capital gain treatment under IRC section 631(b) (see the 

summary of Rev. Rul. 77-229, appendix A). In this type of operation, the grower usually provides a saw to the customer who 

proceeds to choose and cut his or her own tree. The customer 

then pays a previously agreed-upon price and takes ownership 

of the tree. Under these circumstances, buyers do not have a 

contract right to cut the tree as required under section 631(b). 

They may choose not to cut and purchase a tree at all, at their 

election. Such sales are of “cut timber” because the buyer never 

acquires title to or a contract right to cut any tree. The buyer 

in effect, acts as the agent of the grower in cutting the tree and 

purchases a cut Christmas tree.

Although it may be possible for you to establish an onsite sales 

procedure to meet the IRC section 631(b) requirements, the process probably would not be worth the trouble. Choose-and-cut 

operators who want capital gain treatment should elect to treat 

the cutting as a sale under IRC section 631(a). If you had not harvested the trees but had entered into a cutting 

contract with a jobber you would calculate the gain as follows:

6,000 trees sold for $3.60 per tree ...................................$ 21,600

Less depletion allowance of $0.21 per tree....................... – 1,260

Less expenses for administering cutting contract.............. – 120

Income .............................................................................$ 20,220

If the cutting contract qualified as a disposal under the provisions of 

IRC section 631(b), the $20,220 would be reported as a capital gain. 

Otherwise, it would be reported as ordinary income.

Example 10.2.
82 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 83

Most of the chapters in this guide focus on tax issues related 

to the production and sale of timber, but forest land generates 

many other types of products that also can be marketed. The 

sale of nontimber forest products can provide income to help 

offset the costs of owning and managing forest land or for 

other purposes. In nearly all cases, however, the income is not 

a capital gain, but ordinary income subject to higher Federal 

tax rates and Social Security self-employment tax. This chapter 

lists a broad sample of nontimber forest products and discusses 

their tax treatment.

Products Taxed as Ordinary 

Income

Byproducts From Timber Harvests

Income from byproducts of a timber harvest sold separately 

from the harvest itself generally is ordinary income, even if 

the timber was harvested and converted into products for sale 

under the provisions of Internal Revenue Code (IRC) section 631(a) (chapter 5). This includes income from the sale of 

products from logging residues, such as pulpwood culled from 

downed tree tops and limbs, chips, mulching material, and 

firewood. It also includes income from the sale of tree stumps

and roots left after a harvest, although income from the sale in 

one lot of stumps from land acquired in a cutover condition as 

a real estate investment does qualify as a capital gain (see the 

summary of Revenue Ruling 57-9, appendix A).

Fee Activities and Leases

Income from for-fee recreational activities and most forest-related leases is ordinary income. This includes income from fee 

camping and fishing, hunting leases, and long-term land leases. 

In contrast, income received under a long-term timber management contract which specifies that the payments are partial payments for the average annual increment of wood fiber the land 

is capable of producing is a capital gain. Such contracts were 

used by forest products firms in the South during the 1960s, 

and it is likely some are still in effect.6

Products From Trees

Income from products gathered or collected from trees—such 

as wild fruits or nuts, cuttings for seasonal decorations, pine 

straw, or maple syrup—is ordinary income.

Living Trees

Income from the sale or disposal of evergreen trees that are 

more than 6 years old when cut and sold for ornamental purposes (that is, Christmas trees) can qualify as a capital gain, 

as discussed in chapters 5 and 10. Trees sold live, however, 

as living Christmas trees or landscaping trees, are considered 

horticultural products. They are not eligible for the provisions 

of IRC section 631(a) or 631 (b), and income from their sale is 

ordinary income.

Products From Wild Forest Plants

Literally hundreds of species of forest plants are used for 

culinary, decorative, educational, medicinal, or research purposes. Income from products gathered or collected from forest 

plants—such as wildflowers for sale fresh or dried, vines, edible 

plants, herbs, medicinal plants, or botanical samples—is ordinary income.

Products From Cultivated Forest Plants

As gathering and collecting of forest plants has caused wild 

stocks to diminish, interest has grown in cultivating forest 

plants in shade beds or simulated wild conditions. Income derived from cultivated forest plants that are annuals or from the 

leaves, flowers, or bark of perennials is ordinary income. As 

discussed in the following section, however, income derived 

from the roots or main stems of cultivated forest plants that are 

perennials can qualify as a capital gain.

Products Taxed as a Capital Gain

Qualifying Income From Tree Stumps and 

Long-Term Contracts

As noted previously, income from the sale in one lot of tree 

stumps from land acquired in cutover condition qualifies as a 

Chapter 11. Taxation of Nontimber Forest Products

6

 See W.C. Siegel. 1973. Long-term Contracts for Forest Land and Timber in the South. Research Paper SO-87. USDA Forest Service, Southern Forest Experiment Station, 

New Orleans, La. 14 p., and J.L. Greene. 1979. The increment contract. Southern Journal of Applied Forestry. 3(3): 82–85.
84 Forest Landowners’ Guide to the Federal Income Tax

capital gain, as does income under a long-term timber management contract which specifies that the payments are partial 

payments for the average annual increment of wood fiber the 

land is capable of producing.

Qualifying Income From Cultivated Forest 

Perennials

Income from sale of the roots or main stems of cultivated 

forest plants that require more than 1 year to produce salable 

products also can qualify as a capital gain. The most commonly cultivated forest perennials include American ginseng 

(Panax quinquefolius), black cohosh (Cimicifuga racemosa), 

and goldenseal (Hydrastis canadensis).

Among traditional agricultural products, the cultivation of 

forest perennials is perhaps most similar to orchard trees or 

grapevines, but the tax situation is quite different. With orchard 

trees or grapevines, the plant is depreciable capital, the fruit is 

the product, and income from the sale of the fruit is ordinary 

income. With cultivated forest perennials—as with trees grown 

for timber—the plant itself is both capital and product, and income from the harvest of the plant can qualify as a capital gain.

Forest perennials can be grown from seed or from cuttings. Either approach is inherently a business operation. Both require 

careful selection and preparation of a site. Growing plants 

from seed requires collection and stratification of the seed, 

planting the prepared seed in seedbeds, and transplanting the 

seedlings into prepared gardens. Growing plants from cuttings 

involves fewer steps and provides a somewhat faster return, 

but still requires careful preparation of the garden, cultivation, 

and regulation of shade.7

Plants grown in simulated wild conditions command a higher 

price than those grown in shade beds, but entail considerably 

greater risk. American ginseng plants grown from seed require 

up to 10 years to produce a salable product, whereas plants 

grown from root cuttings require up to 8 years. Black cohosh 

or goldenseal plants grown from seed require 6 to 7 years to 

produce a salable product, whereas plants grown from root cuttings require 3 to 5 years.8

Reporting Expenses and Income 

From Nontimber Forest Products

Sale of nontimber forest products can help substantiate a profit 

motive, so forest owners should keep careful record of their 

expenses and income (chapter 15). Depending on the level of 

involvement, production of several types of nontimber forest 

products can qualify as a trade or business (see chapter 4, “The 

Passive Loss Rules”).

Expenses incurred to gather, grow, process, or market nontimber forest products are deductible expenses, subject to the 

same guidelines as operating expenses for timber production (see chapter 4, “Currently Deductible Costs: Operating 

Expenses and Carrying Charges”). Owners who qualify as 

investors should report deductible expenses as miscellaneous 

itemized deductions on Internal Revenue Service (IRS) Form 

1040, Schedule A, where they will be subject to the 2 percent 

of adjusted gross income floor. Owners who qualify as material participants in a trade or business should report deductible 

expenses on IRS Form 1040, Schedule C or F, as appropriate. 

Expenses incurred to establish forest perennials are capital expenses (see chapter 4, “Capital Costs”). They should be posted 

to a capital account and deducted from the gross proceeds from 

the sale of the harvested plants, using IRS Form 4797: Sales of 

Business Property.

Owners who qualify as investors should report ordinary income 

from the sale of nontimber forest products as “Other income” 

on the front of IRS Form 1040, and capital gains on IRS Form 

1040, Schedule D. Owners who qualify as material participants 

in a trade or business should report ordinary income from the 

sale of nontimber forest products on IRS Form 1040, Schedule C 

or F, as appropriate, and capital gains on IRS Form 4797.

7

 See Z. Gardner. 2002. Special Supplement on AgroForestry: Cultivation and marketing of woodland medicinal plants. The Natural Farmer. 2(53, Spring): 19–25, and R. Beyfus. 

2002. Special Supplement on AgroForestry: Growing ginseng in your woodlot. The Natural Farmer. 2(53, Spring): 43–46.

8

 Ibid.
Forest Landowners’ Guide to the Federal Income Tax 85

The form of ownership in which forest property is held is important from a tax standpoint. Furthermore, if the forest property is operated as a business, the type of business organization 

chosen also has significant tax implications. In addition, nontax 

factors can influence the choice of an ownership or business 

format. These factors include forest management goals, size of 

the property, family considerations, and income needs—among 

other things. In the final analysis, the decision should be based 

on the facts and circumstances of each particular situation.

Basic Ownership Considerations

Sole Ownership

Ownership of property in one name normally is the simplest 

type of ownership. Transfers to others usually can be done with 

a minimum of red tape. Sole ownership also typically affords 

the most complete control possible. In a business, sole ownership means an unincorporated business owned by a single individual (sole proprietor). A significant advantage is that profit 

or loss from the business can be calculated separately from 

the owner’s other sources of income. An individual whose forest land is structured as a sole proprietorship reports ordinary 

income and most expenses associated with the property on 

Internal Revenue Service (IRS) Form 1040, Schedule C or F, 

as appropriate. Timber sale receipts that qualify as capital gains 

are reported as discussed in chapter 5. The net income or loss 

reflected on these forms is then transferred to the first page of 

IRS Form 1040 for inclusion in gross income.

Co-Ownership

The undivided ownership of property by two or more persons 

is called co-ownership. This method of holding property often 

is used as a substitute for more complex ownership or business 

arrangements. Transfer of an undivided co-ownership interest 

at death usually can be done easily and inexpensively; however, there are disadvantages. Individuals often become involved 

in co-ownership without fully realizing what it means in terms 

of loss of freedom and control. Sales may be difficult to accomplish—one co-owner may want to sell, whereas the other 

may not. The laws governing co-ownership vary widely among 

the States. The three basic forms of co-ownership are tenancy 

in common, joint tenancy, and tenancy by entirety. Legal counsel is highly recommended in deciding the best form to use.

Tenancy in Common. Each tenant in common can sell, gift, or 

divide his or her share and transfer his or her interest as he or 

she wishes. Upon death of a tenant in common, that person’s 

undivided interest passes to the heirs under State law or to the 

legatees under provisions of a will.

Joint Tenancy. This arrangement sometimes is called joint tenancy with right of survivorship. A joint tenant can sell or gift his 

or her interest but cannot dispose of it by will. Upon the death 

of a joint tenant, that person’s undivided interest passes to the 

surviving joint tenant(s). Joint tenancy is a fragile device for 

property ownership and should be used cautiously.

Tenancy by the Entirety. In some States, tenancy by the entirety can be created between husband and wife with many of 

the features of joint tenancy. Unlike joint tenancy, however, 

tenancies by the entirety generally are not severable by action 

of one of the co-owners. Normally, they can be created only for 

real estate.

Life Estates

A life estate is a limited property interest. Title to the property 

is transferred, but the life tenant (either the transferor or another designated person) retains for a specified period of time 

the right to use, enjoy, and receive income from the transferred 

property. A life estate usually includes the right to cut and sell 

timber; however, most States have developed their own specific 

legal rules as to a life tenant’s exact timber rights.

In addition to rights, a life tenant also has responsibilities. 

These include paying mortgage interest and property taxes, and 

keeping the property in good condition and protecting it.

Community Property

The nine community property States are: Arizona, California, 

Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, 

and Wisconsin. In these States, as a general rule, all property 

acquired during marriage by either spouse—except by gift or 

inheritance—is community property, one-half owned by each 

spouse in undivided ownership.

Chapter 12. Form of Forest Land Ownership and 

Business Organization
86 Forest Landowners’ Guide to the Federal Income Tax

Business Management 

Organization

If a forest property is small and yields only occasional timber 

sales, the property most likely is being treated as an investment 

for tax purposes. If, however, the holdings involve continuous 

transactions and generate fairly regular income, they may constitute a business. In that case, an evaluation should be made 

as to what ownership structure the business should have to best 

achieve the owner’s objectives. A sole proprietorship, as discussed previously, is simplest. If other persons are involved, a 

partnership, limited liability company, or corporation may be a 

better option. Tax considerations, although important, are usually only one of the factors that should be taken into consideration in determining the type of business organization.

Partnerships

A partnership generally is defined as an association of two or 

more persons to carry on, as co-owners, a business for profit. 

Legal tests for determining what is and is not a partnership 

have been developed in each State and vary from one State 

to another. Although an oral partnership agreement usually is 

valid, it is best to set out all details of the agreement in writing 

to help avoid misunderstandings. A co-ownership arrangement, 

such as one of the types discussed previously, may be held to 

be a partnership for tax purposes upon audit by the IRS, even 

if not formally structured as a partnership under State law. The 

determination depends on the facts and circumstances applicable to the co-ownership (see, however, chapter 9, “Qualified 

Joint Ventures”).

Upon formation, no income tax gains or losses ordinarily are 

recognized with respect to the transfer of assets to the partnership by the partners. The partnership takes the partners’ basis

(see chapter 5 for a discussion of basis) for property transferred 

to it. The contributions of the partners to the partnership need 

not be equal. In general, assets brought into the partnership, or 

purchased with partnership funds, become partnership property.

Unlimited Liability. Except in the case of a limited partnership (discussed in the following section), each partner has unlimited liability for most obligations of the partnership. Creditors must first go against the partnership assets; they then can 

proceed against the assets of the individual partners.

Minors as Partners. Financial planning in a family forest land 

partnership often involves the transfer of partnership interests 

to minors. Such transfers are made for various reasons—including reduction of the family income tax bill, to lower death 

taxes, and to interest and involve older children in management 

of the forest land. Minors as partners, however, may create 

problems. They are not legally competent to manage their property until they are of age. For Federal income tax purposes, a 

minor is not recognized as a partner unless control is exercised 

by another person for the benefit of the minor—or the minor is 

competent to manage his or her own property under State law 

and to participate in partnership activities equally with adults. 

An additional caution is that the unearned income of minors 

may be taxed at the parent’s income tax rate, as detailed in IRS 

Publication 17, Your Federal Income Tax.

Partnership Taxation. Although a partnership files an income 

tax return, IRS Form 1065: U.S. Return of Partnership Income, 

it is an information return only. Partnerships as entities do not 

pay taxes themselves. Income and losses are passed through to 

each individual partner on Schedule K-1 of Form 1065 in proportion to his or her interest in the partnership, and then entered 

on the partners’ individual returns. IRS Form 1040, Schedule E, 

is used for most pass-through items.

Limited Partnerships

A limited partnership has one or more general partners, and 

one or more limited partners. In many cases, it can be an ideal 

arrangement for family-owned forest land. A limited partner 

is one who contributes cash and/or property but not services. 

Limited partners are not personally liable for partnership debts. 

They are liable only up to the amount of their investment in the 

partnership. Because of this status, they have no right of control 

over operation of the business and no management rights. A 

general partner may also contribute cash and/or property, but 

in addition, has management rights and thus is personally liable for partnership debts. The income tax rules with respect to 

a limited partnership essentially are the same as for a general 

partnership.

Corporations

A corporation is a separate legal entity that has most of the 

rights of an individual. Formed under State law, it is owned by 

its shareholders and governed by a board of directors elected 

by the shareholders. A corporation’s most notable feature is 

the limited liability enjoyed by the shareholders. Legal actions 

against a corporation are satisfied out of corporate assets—the 

assets of the shareholders generally are shielded from liability.
Forest Landowners’ Guide to the Federal Income Tax 87

Corporate Taxation. A corporation reports income and expenses and computes its tax due on IRS Form 1120: U.S. 

Corporation Income Tax Return. A major tax disadvantage 

with respect to a corporation is that earnings are taxed at the 

corporate level when earned and again at the shareholder level 

when received as dividends. Paying earnings as salaries to 

shareholder-employees may eliminate some of the double taxation problem, however, because salaries qualify as a corporate 

business deduction. In addition, earnings can be accumulated 

at the corporate level to a certain limit, which allows postponement of some taxes.

Another disadvantage is that corporate capital gains may be 

taxed as high as 35 percent in contrast to a 15-percent maximum for noncorporate capital gains. In addition, timber held 

by a corporation never receives a stepped-up basis because it is 

corporate stock shares—not the underlying timber assets—that 

are passed to heirs upon the death of a shareholder.

Subchapter S Corporations

A Subchapter S corporation is a corporation formed in the 

regular way under State law that has elected Subchapter S 

status by filing IRS Form 2553: Election by a Small Business 

Corporation. The number of shareholders in a Subchapter S 

corporation is limited to 100, and numerous other requirements 

and restrictions exist.

Tax Considerations. In general, with a Subchapter S corporation no Federal income tax is paid at the corporate level—that 

is, a Subchapter S corporation is not subject to double taxation 

as is a normal corporation, known as a C corporation. Corporate earnings, losses, deductions, capital gains, credits, and so 

forth, are passed through to the shareholders using IRS Form 

1065, Schedule K-1, as with a partnership—although it is done 

by means of an information return, IRS Form 1120-S: U.S. 

Income Tax Return for an S Corporation, which the corporation 

files with the IRS. The individual shareholders report most of 

the pass-through items on IRS Form 1040, Schedule E, also as 

with a partnership.

One tax disadvantage of a Subchapter S corporation is that 

earnings cannot be accumulated at the corporate level to postpone taxation. The earnings of a Subchapter S corporation are 

taxed each year to the shareholders, whether actually distributed or not. This again is the same treatment as with a partnership. Furthermore, as with a C corporation, timber held by a 

Subchapter S corporation does not receive a stepped-up basis at 

the death of a shareholder.

Limited Liability Companies

A limited liability company (LLC) is a hybrid entity that can 

combine the corporate benefit of limited liability for the owners 

with a partnership’s tax advantage of pass-through treatment for 

income tax purposes. The owners of an LLC are termed members rather than shareholders or partners. An LLC generally has 

at least two members, although most States now permit onemember LLCs. For income tax purposes, an LLC may elect to 

be classified as either a partnership or a corporation, depending 

on State law requirements and the LLC’s operating agreement.

Income Tax Features. From an income tax perspective, an 

LLC that is classified as a partnership compares favorably 

with both Subchapter S corporations and partnerships, but 

has additional advantages not available with those forms of 

organization. Like a partnership, an LLC usually is permitted 

under State law to customize the distribution of both cash and 

property, and the allocation of both profits and losses, to its 

members. Also, neither the LLC nor the member recognizes any 

gain or loss if the LLC distributes appreciated property to the 

member. A Subchapter S corporation, on the other hand, cannot 

customize distributions and recognizes gain to the extent that 

the fair market value of any property distributed exceeds the 

corporation’s basis in the property. Any LLC member can materially participate in the organization’s business activities, so that 

income and losses passed through are considered active rather 

than passive, without risking personal liability. In contrast, a 

limited partner who materially participates in the partnership 

business within the meaning of the passive loss rules (see chapter 4) may risk incurring personal liability as a general partner 

for the partnership’s obligations.

Other Tax Entities

Forest land also may be held by an estate or a nongrantor trust 

(a trust that is taxed separately from the person who established 

the trust). These entities are special cases. If income is retained 

by either an estate or a nongrantor trust and not passed through 

to the heirs or beneficiaries, the executor of the estate or the 

trustee of the trust must file a fiduciary return, IRS Form 1041: 

U.S. Income Tax Return for Estates and Trusts. The current tax 

rate structure, with its very low thresholds for the higher brackets, discourages retaining income under ordinary circumstances. 

For 2012, the 25-, 28-, 33-, and 35-percent tax brackets begin 

at $2,400; $5,600; $8,500; and $11,650 of income, respectively 

(see table 5.1).
88 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 89

Very few sections of the Internal Revenue Code (IRC) were 

written specifically for timber activities. The purpose of this 

guide is to answer common timber tax questions asked by family forest landowners. You may, however, have questions not 

adequately covered here, in Internal Revenue Service (IRS) 

publications, or on the National Timber Tax Web site (http://

www.timbertax.org/). This chapter introduces the basic steps 

involved in researching tax questions. Taxpayers with difficult 

tax questions typically seek the assistance of legal counsel, tax 

accountants, enrolled agents, or other qualified tax professionals. Even if you are not comfortable researching tax questions 

yourself, knowledge of the process will enable you to better 

work with your advisor.

The process starts by answering several basic questions. You 

must determine which section(s) of the IRC (statutory law) 

apply and how these sections are interpreted by the IRS (in 

regulations and revenue rulings) and by the courts (case law). 

The final step is to determine how this total body of law and 

interpretations applies to the facts in your particular situation. 

Obviously you must provide these facts.

Statutory Law

The foundation of Federal income tax law is the Internal Revenue Code (IRC), promulgated by legislation passed by the 

U.S. Congress. The U.S. Constitution requires all revenue bills 

to be initiated in the House of Representatives (House). When 

a revenue bill is introduced by a member of the House, the bill 

is referred to the House Committee on Ways and Means. If the 

committee recommends further action on the bill, public hearings are held. The Senate also considers the bill. The Senate 

Finance Committee also may hold hearings. If the House and 

Senate pass different versions of the bill, the differences are 

reconciled by the Joint Conference Committee, which also may 

hold hearings. When the bill completes the legislative process 

and is signed by the President, it becomes part of the IRC of 

1986, as amended.

The official records of hearings and committee reports involving the legislation provide information on what the legislators 

intended to accomplish by enacting the law. This “legislative 

intent” is important in interpreting the law when doubt arises 

about specific language included in it or how it is to be implemented by the IRS.

If you are unfamiliar with tax law it may be difficult to determine which sections of the IRC apply to a particular tax question. Most topics are indexed in tax publications according to 

tax issues and use tax terms. Direct access to appropriate IRC 

sections is possible by using the comprehensive index included 

at the National Timber Tax Web site, http://www.timbertax.org/

research/irc/. Cross-references between commonly used terms 

and technical terms are included. The applicable IRC sections 

are listed under the major headings. The commercial tax services listed in chapter 14 also include comprehensive indexes that 

can be used to determine the appropriate IRC sections.

Administrative Law

The Commissioner of Internal Revenue is charged with implementation of the IRC. The first step is to write and issue Treasury Regulations interpreting the IRC and specifying how it is 

to be implemented. These regulations have the force and effect 

of law. The courts, however, may nullify regulations that are not 

consistent with the IRC or the intent of Congress. After drafting, internal study, and review, regulations are issued as proposed regulations or as temporary regulations. Temporary regulations have the force of law and must be followed. Proposed 

regulations do not have the force of law. Proposed regulations 

become final only after the public has had an opportunity to 

comment on them and these comments are evaluated by the 

IRS. The temporary regulations are superseded when final regulations are issued.

New regulations and amendments to existing regulations are 

issued as Treasury Decisions published in the Federal Register 

and the Internal Revenue Bulletin (IRB), available on the IRS 

Web site at http://www.irs.gov/irb/. It would be impossible to 

write regulations covering all possible factual circumstances. 

Thus, other types of rulings and forms of communication are 

issued by the IRS as the need arises, and also are published in 

the IRB.

Revenue Rulings

Revenue rulings (Rev. Rul.) are official IRS interpretations of 

the IRC, related statutes, tax treaties, and regulations. They are 

published for the information and guidance of taxpayers, IRS 

personnel, and others. In general, revenue rulings set forth the 

tax consequences of the specific transactions described in them. 

Chapter 13. Researching a Tax Question and 

Appeals Procedures
90 Forest Landowners’ Guide to the Federal Income Tax

They represent the official policy of the IRS and are binding 

on the agency until revoked, amended, or otherwise changed. 

Revenue rulings carry less authority than do regulations, and 

courts need not follow them if they are found to conflict with 

the intent of the regulations or the IRC.

Revenue Procedures

Revenue procedures (Rev. Proc.) are issued to explain administrative practices and procedures within the IRS. They relate to 

statutes, tax treaties, and regulations. Revenue procedures may 

set forth a procedure that affects the rights and duties of taxpayers or other members of the public, which should be a matter of public knowledge. In general, a revenue procedure tells 

taxpayers how to do something—for example, how to make an 

election relating to tax consequences.

General Counsel Memoranda

General Counsel Memoranda (GCMs) are issued by the Office 

of Chief Counsel of the IRS. They include technical memoranda and actions on decisions. A GCM is an internal working 

document of the IRS reflecting the opinion of IRS attorneys 

on a specific issue. The Office of Chief Counsel only makes 

selected GCMs available to the public, because of the nature 

of their subject matter. A GCM provides insight into the logic 

behind the official position taken by the IRS in an administrative pronouncement such as a revenue ruling, but cannot be 

used or cited as precedent.

News Releases, Notices, and 

Announcements

Matters of immediate and general concern to taxpayers may 

be addressed in news releases that are provided to the media. 

Notices and announcements are published in the IRB and may 

be released first as news releases; they are issued to inform 

taxpayers of recent changes in the law, the IRS’s intention to 

study a particular area of the tax law, or to clarify the tax consequences of a particular type of transaction.

Private Letter Rulings

A private letter ruling (LTR) is a written statement by the 

National Office of the IRS that is issued in response to a taxpayer’s request. An LTR interprets and applies the tax laws to 

the taxpayer’s specific factual circumstances. In effect, the taxpayer asks the IRS what the tax consequences will be if he or 

she takes a proposed action. Although letter rulings are made 

available to the public, they are not binding precedent and you 

cannot rely on a ruling issued to another taxpayer. Instructions 

for requesting a ruling appear in a Rev. Proc. that is updated 

annually. Payment of a user fee is required for requests. The 

IRS also limits the issues upon which it will provide rulings for 

specific taxpayers.

Technical Advice Memoranda

A technical advice memorandum (TAM) consists of advice 

or guidance furnished by the National Office of the IRS upon 

request of an IRS district office or appeals office. It responds 

to a technical or procedural question on a specific set of facts 

arising out of an examination of a tax return and involves the 

interpretation and proper application of tax law, tax treaties, 

regulations, revenue rulings, or other precedents published by 

the National Office. A taxpayer also may request that a district 

or appeals office refer an audit issue to the National Office. 

Although technical advice memoranda are made available to 

the public, you should not rely on a TAM issued with respect 

to another taxpayer. Instructions on requesting a TAM are published in a Rev. Proc. that is updated annually.

Case Law

If a question is clearly covered by the IRC, you must follow the 

IRC or seek legislative remedy—that is, have the IRC changed. 

If your circumstances are covered by the regulations or revenue rulings, you must follow them or expect that the IRS will 

challenge any contrary position taken. If you disagree with the 

position taken by the IRS in proposing adjustments to your tax, 

then you may appeal through the administrative appeals process and ultimately may have to defend your position in court. 

Sometimes your circumstances may not be specifically covered 

by the IRC, regulations, revenue rulings, court decisions, or 

other authority. In that case, you and your advisors must interpret the law yourselves, consistent with what you believe to be 

congressional intent, and seek justification for your interpretation in the general body of tax literature.

Case law consists of the findings of the various Federal courts 

on tax questions that have been brought to trial. The significance of the findings of a court on an income tax matter varies 

greatly, depending on the particular court involved and the response of the IRS to the findings of the court.

The types of courts are reviewed first, followed by the possible 

responses of the IRS to court rulings. Finally, guidelines are 

provided on how to interpret court decisions.
Forest Landowners’ Guide to the Federal Income Tax 91

Federal Court System

If you and the IRS still disagree after your appeals conference 

within the IRS, you may take your case to either the U.S. Tax 

Court, the U.S. District Court for the district in which your tax 

home is located, or the U.S. Court of Federal Claims if you meet 

certain jurisdictional requirements discussed later in this section. 

These courts are independent judicial bodies and have no connection with the IRS. The Federal court system is explained at 

http://www.uscourts.gov/FederalCourts/UnderstandingtheFeder 

alCourts/FederalCourtsInAmericanGovernment.aspx.

If you elect to bypass the IRS appeals system, you may take 

your case to any of the courts mentioned in the previous paragraph. A case petitioned to the U.S. Tax Court, however, will 

normally be considered for settlement by an appeals office in 

the applicable IRS region before the Tax Court hears the case. 

Where the taxpayer elects to bypass the IRS appeals system, 

the Tax Court may impose a penalty of up to $5,000 if it appears to the Court that the taxpayer unreasonably failed to pursue available administrative remedies. In general, findings of 

the Tax Court may be appealed to a higher court. The appeals 

process is discussed under “Audits and Appeals,” later in this 

chapter. The following Federal courts hear tax cases.

U.S. Tax Court. The U.S. Tax Court (Tax Court) was created 

by Congress specifically to hear Federal tax cases. The court 

is independent with its principal address in Washington, DC, 

but it hears cases throughout the Nation in designated Federal 

courtrooms. The Tax Court has jurisdiction of a case only if 

the IRS issues a statutory notice of deficiency. Procedures for 

taking a case to the Court are at http://www.ustaxcourt.gov/taxpayer_info_intro.htm. You have 90 days from the date the deficiency notice is mailed (150 days if mailed to you outside the 

United States) to file a petition with the Tax Court. In general, 

the Tax Court hears cases only if the tax has not been assessed 

and paid; however, you may pay the tax after the notice of deficiency is issued and still petition the Tax Court for review.

If your case involves a dispute of not more than $50,000 for 

any single tax year or period, the Tax Court provides a simple 

alternative for resolving disputes. At your request, and with 

the approval of the Tax Court, your case may be handled under 

“the small tax case procedures” whereby you can present your 

own case to the Tax Court for a binding decision. If your case 

is handled under this procedure, the decision of the Tax Court 

is final and cannot be appealed. You can get more information 

regarding the small tax case procedures and other Tax Court 

matters from the U.S. Tax Court, 400 Second Street, NW, 

Washington, DC 20217.

U.S. District Courts and U.S. Court of Federal Claims. In 

general, U.S. District Courts (District Courts) and the U.S. Court 

of Federal Claims (Federal Claims Court) hear tax cases only after you have paid the tax deemed due by the IRS and have filed 

a claim for a credit or refund. You may file a claim for a credit or 

refund if, after you pay your tax, you believe the tax is incorrect. 

If your claim is rejected by the IRS, you will receive a notice of 

disallowance of the claim unless you signed an IRS Form 2297: 

Waiver of Statutory Notification of Claim Disallowance. If the 

IRS has not acted on your claim within 6 months from the date 

you filed it, you may then file suit for refund. You must file a suit 

for a credit or refund no later than 2 years after the IRS disallows your claim or an IRS Form 2297 is filed.

You may file your suit for credit or refund in your District Court 

or in the Federal Claims Court. The Federal Claims Court does 

not have jurisdiction, however, if your claim is for credit or refund of a penalty that relates to promoting an abusive tax shelter or to aiding and abetting the understatement of tax liability 

on someone else’s return.

U.S. Circuit Courts of Appeals. The findings of either the Tax 

Court or District Courts can be appealed by either the taxpayer 

or the Government to the appropriate regional U.S. Circuit 

Court of Appeals (Court of Appeals). The United States is divided into nine multi-State regions with one Court of Appeals 

for each region. Appeals from the Federal Claims Court are 

heard by the Court of Appeals for the Federal Circuit in Washington, DC.

U.S. Supreme Court. The findings of U.S. Courts of Appeals and the Court of Appeals for the Federal Circuit may be 

reviewed by the U.S. Supreme Court (Supreme Court). The 

taxpayer or the Government may file a petition for a writ of certiorari (request to be heard) with the Court. If the Justices agree 

to hear the case, a writ of certiorari will be granted. Otherwise, 

certiorari will be denied and the findings of the appeals court 

are binding on the parties. As a practical matter, the Supreme 

Court hears very few tax cases. Appeals court decisions are usually the final word in a tax matter.

Interpreting Case Law

Findings of the Supreme Court become law and must be followed by the IRS and taxpayers. This is not the case with decisions of lower courts that find against the Government or the 

Commissioner of Internal Revenue. In such cases, if the court 

finds for the taxpayer in whole or in part, the findings are controlling—assuming no appeal is made—only upon that particular 

taxpayer for the years involved. In some cases, the IRS will not 
92 Forest Landowners’ Guide to the Federal Income Tax

comment at all. The IRS may, however, concur with certain 

findings by formally issuing an announcement of acquiescence

(Acq. or A.). This means that the IRS will apply the findings of 

the court, with regard to the specific points of law involved, to 

other taxpayers. The IRS also may announce its nonacquiescence (Nonacq. or NA.), which means that it will not follow the 

findings of the court, and any taxpayer relying on the case as 

precedent is likely to be challenged by the IRS.

In the process of interpreting and applying the IRC to particular factual circumstances, the courts create nuances in the law. 

Because the Federal courts follow the common law system (relying on precedents instead of on a strict case-by-case reading 

of the statutes) court decisions can be cited to support a position. Precedents must be used appropriately, however. First, 

the precedent cited should be on point, that is, it should deal 

with the same point of law as is involved in the present case. 

Second, the precedent should be applicable to the jurisdiction 

in which the case would be tried. Other cases from the same 

Federal district or region carry the most weight. Decisions 

from other districts or regions may be cited, but need not be 

followed unless the case is upheld by the Court of Appeals for 

the taxpayer’s jurisdiction. Supreme Court decisions are precedent in any jurisdiction. Decisions by the Court of Appeals for 

the Federal Circuit are precedent in the Federal Claims Court.

Interpretation of the weight a case carries can be made by 

studying the entry for the case in a findings list or citator. A 

findings list shows the history of a case and where the decision 

is published. A findings list for timber-related cases is available 

on the National Timber Tax Web site (http://www.timbertax.

org/research/caselaw/). The trial (initial) decision is given first, 

followed by any appellate decisions. The appellate case entries 

show their effect on the trial case. The appeals court can affirm (Aff’d, Aff’g), amplify, or reverse (Rev’d, Rev’g) the trial 

court. A citator also gives the history of a case, but in addition it 

cites the other cases in which the case was cited as precedent.

Audits and Appeals

The IRS has developed special audit programs to monitor abusive tax shelters. Timber-related activities generally are not considered abusive tax shelters. Although auditors are provided with 

special industry guidelines concerning what to look for in auditing returns that report timber transactions, your likelihood of being audited is not known to be increased because of your timber 

activities. You should, however, always conduct your affairs and 

keep records under the assumption that you will be audited.

How Returns Are Selected for 

Examination

Your return may be examined to verify the correctness of 

income, deductions, exemptions, and credits. Most returns 

are selected and given a score by a computer program called 

Discriminant Function System (DIF). The scores assigned by 

DIF relate to the probability that an entry is erroneous. Based 

upon these scores, IRS personnel screen and select returns for 

examination. Periodically, returns are also selected under the 

Taxpayer Compliance Measurement Program (TCMP). This is 

a random selection system used to evaluate overall compliance 

and provide the statistical base used to score returns under the 

DIF program. Returns also may be selected as part of a “compliance initiative” aimed at a specific market segment (occupation, industry, geographic area, or economic activity) where an 

area of noncompliance has been identified. The IRS also does a 

computer match of information documents, such as IRS Forms 

1099 and W-2, which can uncover discrepancies and result in 

an examination.

The Examination Process

If your return is selected for examination, you will be notified 

in writing. The notification will inform you of the method of 

examination and the records you will need to make available to 

the examiner to clarify or support entries on your return. The 

examination may be conducted by correspondence or it may 

take place in your home or place of business, an IRS office, or 

the office of your attorney or accountant. Although the place 

and method of examination are determined by the IRS, if the 

place is not convenient for you the examiner will try to work 

out something more suitable.

Whatever method of examination is used, you may act on your 

own behalf or you may have someone represent you or accompany you. If you filed a joint return, either you, your spouse, or 

both, may meet with the examiner. An attorney, a certified public accountant, a person enrolled to practice before the IRS, or 

the person who prepared the return and signed it as the preparer 

may represent or accompany you. You must furnish your representative with written authorization. IRS Form 2848: Power of 

Attorney and Declaration of Representative or any other properly written authorization may be used for this purpose.

In general, your tax return is examined in the IRS district where 

you live. At your request, however, the examination may be 

moved to another district for reasonable cause.

If You Agree. If you agree with the findings of the examination, you will be asked to sign an agreement form. If you owe 
Forest Landowners’ Guide to the Federal Income Tax 93

additional tax, you may pay it when you sign the agreement. If 

you pay when you sign the agreement, interest is charged on 

the additional tax from the due date of the return examined to 

the date you pay.

If you do not pay the additional tax when you sign the agreement, you will receive a bill for it. The bill will include interest 

on the additional tax from the due date of the return examined 

to the billing date. If the tax is not paid within 10 days after the 

billing date, interest starts accruing again. If the examination 

results in a refund, you will receive interest at the applicable 

rate on the refund.

If You Do Not Agree. If you do not agree with the changes 

proposed by the examiner, the examiner will explain your 

appeal rights. These include your right to request an immediate meeting with the examiner’s supervisor to explain your 

position. If agreement is not reached at this meeting, or if the 

examination takes place outside of an IRS office, the IRS will 

send you the following:

1. A letter notifying you of your right to appeal the proposed 

adjustment within 30 days;

2. A copy of the examination report explaining the proposed 

adjustments;

3. An agreement or waiver form; and

4. A copy of IRS Publication 5, Your Appeal Rights and How 

To Prepare a Protest If You Don’t Agree.

If after receiving the examination report you decide to agree 

with the findings, you sign the form and return it to the examiner. You may pay any additional amount and the applicable 

interest you owe without waiting for a bill.

If after receiving the examination report you decide not to 

agree with the examiner’s findings, the IRS urges you to appeal 

your case within the IRS before you go to court. Most differences can be settled with an appeals office in the region without the need to go to court.

How To Stop Interest From Accruing. You can stop the 

further accrual of interest on any amount the IRS claims you 

owe, or that you believe it will claim you owe, by remitting the 

appropriate amount. Your remittance may be made either as a 

deposit in the nature of a cash bond (deposit) or as a payment 

of tax. If you also want to stop the accrual of compound interest, you should remit any interest due. A deposit differs from a 

payment in that you can request the return of a deposit at any 

time without filing a claim for a refund. A deposit will not be 

returned, however, if the IRS has determined that returning 

it will jeopardize collection of a possible deficiency or that it 

should be applied against another tax liability. Also, deposits do 

not earn interest.

If at the end of the examination you agree with the findings of 

the examiner, your deposit will be applied against the amount 

you owe. A notice of deficiency will not be mailed to you and 

you will not have the right to take your case to the Tax Court.

Appeals Within the IRS

Within the IRS, there is a single level of appeal. Your appeal 

from the findings of the examiner is to an appeals office in the 

region. This office is independent of the District Director. Appeals conferences are conducted as informally as possible. If 

you want an appeals conference, address your request to your 

District Director according to the instructions in the letter you 

will receive. If agreement is not reached at your appeals conference, you may, at any stage of the procedure, take your case to 

court.

Together with your request for a conference, you may need 

to file a written protest or brief statement of disputed issues 

with your District Director. Such filings are unnecessary if the 

proposed increase or decrease in tax, including penalties, or 

claimed refund due resulting from a field examination, is not 

more than $2,500 for any of the tax periods involved—or your 

examination was conducted by correspondence or in an IRS 

office by a tax auditor. If the proposed increase or decrease in 

tax or claimed refund is more than $2,500 but not more than 

$10,000, an appeals office conference will be granted if a brief 

written statement on the disputed issues is provided. You should 

list in the statement the adjustment(s) to which you disagree and 

the reason you disagree with each. A written protest of disputed 

issues is required to obtain an appeals office conference when 

the proposed increase or decrease in tax, or claimed refund, is 

more than $10,000. In addition, a written protest is required to 

obtain appeals consideration in all partnership and Subchapter 

S corporation cases, as well as in two others. See IRS Publication 556, Examination of Returns, Appeal Rights, and Claims 

for Refund, for more information on appeal rights, including 

guidance on preparing a written protest.

Appeals to the Courts

If you and the IRS still disagree after your conference, or if 

you bypassed the appeals process within the IRS, you may take 

your case to the Tax Court, the Federal Claims Court, or your 

District Court as explained previously. Even if you elect to bypass the IRS appeals system, a case petitioned to the Tax Court 
94 Forest Landowners’ Guide to the Federal Income Tax

normally will be considered for settlement by an appeals office 

before the Tax Court hears the case. If you are a prevailing 

party in a civil court case against the IRS, you may be entitled 

to recover reasonable litigation costs, if (1) you exhausted all 

administrative remedies within the IRS, (2) your net worth is 

less than a certain limit, and (3) you do not unreasonably delay 

the proceeding.

For information about procedures for filing suit in the courts, 

contact the Clerk of the Tax Court, the Clerk of your District 

Court, or the Clerk of the Federal Claims Court. Addresses of 

the courts are given in IRS Publication 556.

Claims for Refund

After you have paid your tax, you have the right to file a claim 

for a credit or refund if you believe the tax was calculated 

incorrectly and is too much. If you filed IRS Form 1040, 1040-

A, or 1040-EZ, you may claim a credit or refund by filing IRS 

Form 1040-X: Amended U.S. Individual Income Tax Return. 

Mail it to the IRS Center where you filed your original return. 

A separate form must be filed for each tax year or period involved. Include an explanation of each item of income, deduction, or credit on which you are basing your claim.

A claim for a credit or refund must be filed within 3 years from 

the date the original return was filed (including extensions) 

or within 2 years from the date the tax was paid, whichever is 

later. Original returns filed before the due date are considered 

to have been filed on the due date.

Additional Information

For additional information, consult IRS Publications 5, Your 

Appeal Rights and How To Prepare a Protest If You Don’t 

Agree and 556, Examination of Returns, Appeal Rights, and 

Claims for Refund.

Integrated Example of Tax 

Research

As an example of tax research procedures, assume you execute 

an oral agreement to sell timber on the shares to a logger. The 

logger agrees to cut your timber, sell the logs produced to a 

sawmill, and give you 40 percent of the amount received from 

the sawmill for the logs. You are not certain how to report the 

payments you receive from the logger on your tax return—that 

is, whether as a capital gain or ordinary income—and how to 

recover your basis in the timber cut.

From reading this guide, you are aware that capital gain treatment depends on how you dispose of timber and your primary 

purpose for holding it. If you “dispose” of timber on the stump 

and the timber is a capital asset in your hands, the proceeds are 

reported as a long-term capital gain if you held the timber for 

more than 1 year. If you held the timber primarily for sale to 

customers in the ordinary course of a trade or business, your 

disposal must meet the requirements of IRC section 631(b) 

to qualify for capital gain treatment. If you sell products from 

your timber cut by you or by others providing a logging service 

for you, you do not qualify for capital gain treatment on the 

proceeds from the sale of the logs, but may elect to treat the 

cutting of the timber as a sale under the provisions of IRC section 631(a).

Because you have conducted many timber sales from your land 

in the 20 years you have owned it, receive a substantial portion 

of your total income from these timber sales, and in general 

conduct your timber-related activities in a manner consistent 

with being in the business of selling timber, you conclude that 

your timber is held primarily for sale.

The next question is whether you have disposed of timber on 

the stump, or whether the logger is providing a logging service 

under the oral contract and is selling the logs produced on your 

account. Because nothing in the IRC or regulations specifically 

deals with oral timber agreements, you must research case law 

for guidance. In the index of one of the tax services, under “disposal with a retained economic interest,” you find several cases. 

The first one listed is Ah Pah Redwood Co. versus Commissioner, 26 T.C. 1197 (1956) (reversed in part and remanded), 

251 F. 2d 163 (9th Cir. 1957), 18 T.C.M. 202 (1959), which 

happens to involve an oral agreement. By reading this case, you 

find that the court concluded that the oral contract in question 

was valid under the laws of the State in which it was executed 

because real property to be severed upon sale was not subject to 

the contract law generally applicable to a sale of real estate (the 

Statute of Frauds did not apply). Because the same law applies 

in your State, you conclude that your oral agreement with the 

logger is an enforceable contract. But in reading Ah Pah Redwood Co., you note that the court ruled that the taxpayer could 

get capital gain treatment under a disposal with an economic 

interest retained only if the taxpayer was not holding the timber 

primarily for sale. This court’s ruling conflicts with the discussion in this publication, which says that disposals qualifying 

under IRC section 631(b) receive capital gain treatment—regardless of the purpose for which the timber was held. Upon 

further investigation, the index in the tax service refers you to 

Rev. Rul. 57-90 (1957-1 C.B. 199), in which the IRS notes that 
Forest Landowners’ Guide to the Federal Income Tax 95

the finding of the court in Ah Pah Redwood Co. will not be 

followed by the IRS to the extent that it is inconsistent with the 

IRS position that section 631(b) will be applied to a disposal of 

timber with an economic interest retained regardless of the taxpayer’s business or the purpose for which the timber is held.

In analyzing whether you have disposed of your timber with 

an economic interest retained, you conclude that you in fact 

did dispose of the standing timber to the logger. Under the oral 

agreement, the logger was obligated to cut the timber, the logger could sell the logs to any mill he chose, you could not dispose of the same timber to anyone else, and you had no control 

over the logger’s activities other than to ensure that his activities did not cause serious soil erosion or damage field crops.

You also conclude that you retained an economic interest in the 

timber disposed of because you would be paid only for the timber actually cut and sold. The logger did not agree to pay you a 

fixed amount.

Therefore, you conclude that under the terms of the shares 

agreement in question, payments you received from the logger 

during the tax year qualify for long-term capital gain treatment 

under IRC section 631(b), and that your allowable basis in the 

timber disposed of can be recovered as discussed in chapter 5.
96 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 97

Many sources of tax assistance are available. Your personal 

attorney, accountant, or tax preparer should be your first point 

of contact. If they are not expert in the tax treatment of timber 

transactions, however, additional help may be needed. The Internal Revenue Service (IRS) taxpayer assistance program has 

trained personnel answering toll-free taxpayer service phones 

to deal with many tax questions; however, these individuals 

may not be familiar with the intricacies of the tax treatment of 

timber. This chapter discusses additional sources of assistance.

IRS Publications

The IRS maintains a comprehensive taxpayer publications program designed to provide you with up-to-date tax information. 

No IRS publication deals specifically with timber, however. 

This guide supplements the IRS taxpayer publications by compiling tax information that directly affects forest landowners. 

The IRS publications providing the general tax background 

needed to handle timber transactions are cited in the text of this 

Chapter 14. Sources of Tax Assistance

Publication 

Number Title

1 Your Rights as a Taxpayer

5 Your Appeal Rights and How To Prepare a Protest If You Don’t Agree

15 (Circular E), Employer’s Tax Guide

15-A Employer’s Supplemental Tax Guide (Supplement to Publication 15 (Circular E), Employer’s Tax Guide)

17 Your Federal Income Tax For Individuals

225 Farmer’s Tax Guide. A comprehensive guide for taxpayers who qualify as farmers. This publication contains much information about 

timber transactions

334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ). A comprehensive guide for owners of small businesses, 

corporate and noncorporate. Few timber transactions are discussed.

463 Travel, Entertainment, Gift, and Car Expenses

501 Exemptions, Standard Deduction, and Filing Information

505 Tax Withholding and Estimated Tax

526 Charitable Contributions

527 Residential Rental Property (Including Rental of Vacation Homes)

529 Miscellaneous Deductions

534 Depreciating Property Placed in Service Before 1987

535 Business Expenses

536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts

537 Installment Sales

538 Accounting Periods and Methods

541 Partnerships

542 Corporations

544 Sales and Other Dispositions of Assets

547 Casualties, Disasters, and Thefts

550 Investment Income and Expenses (Including Capital Gains and Losses)

551 Basis of Assets

552 Recordkeeping for Individuals

556 Examination of Returns, Appeal Rights, and Claims for Refund

559 Survivors, Executors, and Administrators

561 Determining the Value of Donated Property

584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)

584-B Business Casualty, Disaster, and Theft Loss Workbook 

587 Business Use of Your Home (Including Use by Daycare Providers)

598 Tax on Unrelated Business Income of Exempt Organizations

910 IRS Guide to Free Tax Services

925 Passive Activity and At-Risk Rules

946 How to Depreciate Property

950 Introduction to Estate and Gift Taxes
98 Forest Landowners’ Guide to the Federal Income Tax

guide. IRS publications can be obtained at no charge from the 

IRS or online at http://www.irs.gov/app/picklist/list/formsPublications.html. The listed IRS publications contain background 

information that may be helpful in understanding the tax treatment of timber activities. 

Commercial Tax Services

The following companies publish comprehensive Federal 

income tax information that is updated weekly. Many public 

libraries receive these publications, which discuss timber 

transactions under the applicable Internal Revenue Code (IRC) 

sections:

1. Federal Tax Coordinator, published by Thomson Reuters 

Tax and Accounting (http://ria.thomsonreuters.com/), 

located in New York, New York.

2. Standard Federal Tax Reporter, published by CCH Group 

(http://www.cch.com/), a Wolters Kluwer business located 

in Chicago, Illinois.

The Internet

1. The IRS Web site (http://www.irs.gov) contains a 

wealth of tax-related information, including news on 

IRS developments, tax forms and publications, and other 

information.

2. The National Timber Tax Web site (http://www.timbertax.

org), maintained by Southern Regional Extension Forestry 

at the University of Georgia in cooperation with the U.S. 

Department of Agriculture (USDA), Forest Service and 

National Woodland Owners Association, is a comprehensive 

source of information on forest taxation.

Otherwise, if you access a Web site with which you are not 

familiar, be certain to determine the reliability of the information on the Web site before using it.

Tax Preparation Software and 

Electronic Filing

The IRS strongly encourages taxpayers to file electronically, 

that is, to e-file. Options for e-filing can be found at http://

www.irs.gov/efile/index.html. Large businesses have been required to e-file for many years. The IRS has e-file agreements 

with many tax preparation software companies. In addition, 

the IRS Web site has free tax preparation software. The major 

commercial software packages handle most timber transactions, 

including the reforestation deduction and amortization provisions, either as adjustments to gross income, or as a business 

expense.

Many timberland owners will need to file on paper, however. 

Attachments are frequently required, such as when a taxpayer 

elects to expense reforestation deductions under IRC section 

194 or to exclude the qualified portion of a cost-sharing payment under IRC section 126. Also, IRS Form T (Timber) may 

need to be filed.

Starting with the 2008 filing season for 2007 tax returns, the 

IRS revised Form 8453: U.S. Individual Income Tax Transmittal for an IRS e-file Return, with respect to attachments mailed 

in after the return is filed electronically. This form was previously used to file a paper signature for an e-return. The revised 

Form 8453 can only be used with attachments specifically 

listed on the front of the form. None of the attachments typically associated with timber transactions are listed. Thus, if you 

need to file a return with timber-related attachments, you will 

need to file on paper. Of course tax software can be used to prepare your return, but it will need to be printed out and mailed 

in with the required attachments. Do not file electronically and 

then simply mail in the attachments. The IRS will not be able to 

merge the electronic and paper elements.

If you use tax preparation software you will need to maintain 

your timber accounts separately to determine the allowable basis or depletion allowance for timber disposals. If you know the 

procedures you can maintain these accounts on a spreadsheet 

such as Microsoft Excel®, Lotus 1-2-3®, or Apple iWork Numbers®. Commercial accounting software can be used as well.

Tracking Current Developments

Several publications include information on the tax treatment 

of timber and updates on changes. Publications that are national 

in scope include:

1. Tax Tips for Forest Landowners, produced by the USDA 

Forest Service, Cooperative Forestry, provides an annual 

summary of Federal income tax provisions that affect forest 

owners. You can find the most recent edition at http://www.

fs.fed.us/spf/coop/.

2. National Woodlands, published quarterly by the 

National Woodland Owners Association (http://www.

woodlandowners.org/), located in Vienna, Virginia. The 

magazine also provides tax legislative updates.
Forest Landowners’ Guide to the Federal Income Tax 99

3. Tree Farmer Magazine, published by the American Forest 

Foundation (http://www.treefarmsystem.org/), located 

in Washington, DC, features in-depth discussions of taxrelated topics..

4. Forest Landowner Magazine, published six times per year 

by the Forest Landowners Association (FLA; http://www.

forestlandowners.com/), located in Atlanta, Georgia. All 

issues provide legislative updates. FLA also publishes 

newsletters with tax developments.

Several other State and regional forest owner organizations 

have magazines that regularly feature tax information in their 

winter or spring issues. These magazines include Virginia 

Forests, published by the Virginia Forestry Association (http://

www.vaforestry.org/); Northwest Woodlands, published in 

cooperation with forest owner groups in Oregon, Washington, 

Idaho, and Montana; Woodland Management, published by the 

Wisconsin Woodland Owners Association (http://www.wisconsinwoodlands.org/); and Capital Ideas, published by the Alabama Forest Owners’ Association (AFOA). AFOA also hosts 

Capital Ideas—Live, a monthly Web-enabled news conference 

for forest owners that frequently covers tax topics, available at 

http://www.afoa.org/.
100 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 101

Systematic and timely recording of transactions by type, purpose, and amount is vital for proper management of long-term 

forest investments and tax compliance. In addition, accurate 

records, coupled with knowledge of the Federal income tax 

rules, allow you to ensure fair tax treatment of the income and 

expenses associated with your forest ownership as intended by 

Congress. Tax items discussed previously include (1) qualifying timber revenue as a long-term capital gain; (2) recovering 

invested capital through current deductions, depletion, depreciation, and amortization; and (3) deducting management and 

qualified reforestation expenses while complying with the passive activity loss rules for businesses. Provisions concerning 

cost-sharing payments, involuntary conversions, installment 

sales, and like-kind exchanges also may be important to you.

You should keep accurate and complete documentation of 

your forest activities to verify all entries made on tax returns. 

Examples of documents to keep include invoices, contracts, 

receipts, canceled checks, and maps that validate forest land 

holdings and forest operations. See Internal Revenue Service 

(IRS) Form T (Timber) in appendix B for examples of entries 

that may be required. You should retain documents related to 

currently deductible expenses on your forest land for a minimum of 3 years from the date the tax return reflecting them is 

filed. This is the ordinary limit for audit by the IRS, although in 

some cases, this limit can reach up to 6 years after the return is 

filed. If a return is false or fraudulent, however, or if no return 

is filed, an action by the IRS generally can be brought at any 

time. Documents relating to acquisition of land, timber, and 

other capital items (discussed in chapter 4) should be held for 

the entire period of ownership, plus a minimum of 3 years after 

the disposition.

Taxpayers should keep books and records adequate for audit—this means that the books and records exist, are in proper 

form, and are readily accessible. An IRS auditor could compel 

you to produce the records needed to audit your return. IRS 

Publication 556, Examination of Returns, Appeal Rights, and 

Claims for Refund provides additional information on audit 

procedures. If you are unsure about the appropriate records to 

keep after reading this chapter, you should consult with a qualified tax accountant, as discussed in chapter 2. The income tax 

accounts needed for recording forest expenditures and timber 

sale revenue are discussed in this chapter. IRS Publication 538, 

Accounting Periods and Methods, can be consulted for additional details.

Management Information

Good records are essential for a successful forest management 

program as well as for tax purposes. They show the status of the 

timber inventory, timber growth rates, current cost and revenue 

information, and projected cash flows for your forest activity. This information can be used to analyze the efficiency of 

proposed management options, enabling you to make informed 

choices in a timely manner. They also should show the relationship between your management decisions and the profit potential of your forest land. Adequate records also serve as historical 

documents that can help you avoid repeating mistakes.

Accounting Methods

You may adopt an accounting method that provides the most 

favorable tax treatment for your forest activities as long as it 

clearly reflects revenues and expenses. It may be the same as 

one you use in other businesses or investment activities, or it 

may be different as dictated by the nature and scope of your 

forest program. The two accounting methods in general use are 

cash and accrual.

Cash Accounting

With cash accounting revenue is reported when actually or constructively received, and expenses are deducted when actually 

paid. Most small service firms and farms (including forest ownerships) have adopted cash accounting methods that are simple, 

flexible, and effective.

Accrual Accounting

With accrual accounting revenue is recorded when it is earned, 

whether or not received at that time. Expenses are deducted 

when they are incurred rather than when actually paid. An accrual accounting method is preferred by accountants and is used 

by many incorporated timber businesses. It has the advantage 

of evenly matching income and expenses so that revenues and 

costs are recorded closer to the time they actually occur. Thus, 

the accrual method more nearly reflects economic activity, 

which may or may not be matched by a concurrent cash flow. 

One disadvantage of the accrual method is that it does not postpone the payment of tax until revenue actually is received.

Chapter 15. Forest Records
102 Forest Landowners’ Guide to the Federal Income Tax

Date Accounts and Explanation Reference Debits

$

Credits

$

Taxpayers may use combinations of the cash and accrual methods as long as the procedure adequately reflects income and 

is followed consistently. The installment method of reporting 

revenues (see chapter 9) is an example of a hybrid accounting 

method. IRS approval by filing IRS Form 3115: Application 

for Change in Accounting Method is generally necessary before an accounting method can be changed.

Recordkeeping Systems

Shoebox

You should develop a systematic recordkeeping approach for 

your forest activities records, even for small tracts held as an 

investment. The much joked-about shoebox system is better 

than nothing if organized and followed routinely. If you adopt 

this system, you can use business envelopes and label one for 

each tax category that applies to your activity. You then file 

the documents for each activity by category as it occurs. The 

categories that are important are discussed in previous chapters 

and illustrated by the example later in this chapter. Unless you 

also write notes describing transactions and file them in the appropriate envelopes, your shoebox system may not be adequate. 

A journal is a much better alternative for recording transactions 

associated with documents.

A Forest Landowner’s Journal

To improve on the shoebox system, you should maintain a 

journal to record forest management information and activities. A journal is a chronological business diary that contains 

the details of each business transaction—description, purpose, 

date, and dollar amounts involved. Evergreen Tree Farm: Journal (fig. 15.1) is an example. In addition to recording financial 

information, you should include the time you spent on the acFigure 15.1.—Evergreen Tree Farm: Journal.

06/01/06 Temporary capital account 1 2,500

 Cash 2,500

E.Z. Cruiser, Consultant for forest land appraisal report

06/01/06 Temporary capital account 2 275,000

 Cash 75,000

Mortgage payable 200,000

Purchase Evergreen Tree Farm

06/15/06 Temporary capital account 3 4,000

 Cash 4,000

L. Lawyer, attorney for title search, filing, and closing

06/21/06 Evergreen tract (fig. 15.2) 5 59,537

Merchantable sawtimber (figs. 15.3 and 15.6) 6a 161,834

Merchantable pulpwood (not shown) 7 24,407

Young growth (fig. 15.4) 8 22,323

Equipment-Bridge (fig. 15.5) 9 13,399

 Temporary capital account 4 281,500

Allocation of tree farm purchase to permanent capital accounts

12/31/06 Depreciation expense 10 521

 Accumulated depreciation 521

First year depreciation of bridge

12/31/06 Interest expense 11 9,285

Mortgage payable 2,425

 Cash 11,710

Interest expense and mortgage

Principal reduction for 2006 (see Interest Expense and Mortgage Payable Accounts, table 15.1)

01/15/06 Operating expense 12 421

 Cash 421

Forest suppliers for purchase of axes, posted signs, flagging

06/01/06 Bridge maintenance 13 582

Truck maintenance 217

Road maintenance 897

 Cash 1,696

Forest expenses for servicing truck, grading, pulling ditches, and repairing bridge
Forest Landowners’ Guide to the Federal Income Tax 103

Date Accounts and Explanation Reference Debits

$

Credits

$

Figure 15.1.—Evergreen Tree Farm: Journal (continued).

12/31/07 Property tax expense 14 820

 Cash 820

Treasurer, Local County

02/15/08 Expenses of sale (table 15.1) 15 10,950

 Cash 10,950

E.Z. Cruiser, consultant for sale preparation (also see table 15.2)

04/10/08 Cash 16 21,900

 Timber sale revenue 21,900

Deposit (10 percent) on timber sale from Sawyer Lumber Co.

05/07/08 Cash 17 197,100

 Timber sale revenue 197,900

Balance of sale revenue from Sawyer Lumber Co. (also see table 15.1)

12/31/08 Cost of timber sold* 18a 97,100

 Merchantable sawtimber subaccount (value) 97,100

Allowable as basis of sale

Merchantable sawtimber subaccount (also see chapter 5)

06/15/08 Reforestation expense account (not shown) 19 12,500

 Cash 12,500

B. Dozer, contractor for site preparation on 60 acres of cutover land, QTP#1

08/26/09 Bridge maintenance 20 352

Road maintenance 578

 Cash 930

M. Truck, contractor for road grading, bridge repair

09/01/09 Cash 21 5,000

 Reforestation account (not shown) 5,000

Receipt of cost-sharing payments for site preparation (also see table 15.2)

02/10/10 Reforestation expense account (not shown) 22 3,600

 Cash 3,600

E.Z. Cruiser, contractor for planting pine on QTP#1 (table 15.4)

08/06/11 Timber stand improvement 23 1,800

 Cash 1,800

Tom Cleary, contractor for timber stand improvement in 60-acre natural pine stand

09/01/11 Temporary capital account 24 384,900

 Cash 384,900

Mountain Realty Co., acquire Lonesome Pine—120 acres total

09/02/11 Temporary capital account 25 6,400

 Cash 6,400

Mountain Realty Co., appraisal, title search, and legal fees to acquire Lonesome Pine tract

09/15/11 Total cost of property (6,400 + 384,300) 26 391,300

 Land 27 60,998

 Merchantable sawtimber (figs. 15.3 and 15.5) 28a 314,036

 Young growth 29 16,256

Allocation of Lonesome Pine purchases to permanent capital accounts

09/31/11 Pulpwood timber subaccount (not shown) 30 22,323

 Young growth 22,323

Young growth transferred to pulpwood timber subaccount (value not shown)

11/01/11 Travel expense 31 276

 Cash 276

Routine inspection of boundaries, roads, and fire lines from travel diary (not shown)

12/31/11 Property tax expense 32 1,280

 Cash 1,280

To Local County Treasurer for property tax expenses

12/31/11 Interest expense 33 13,992

Mortgage payable 6,092

 Cash 20,084

Interest expense and mortgage principal reduction for 2006
104 Forest Landowners’ Guide to the Federal Income Tax

Date Accounts and Explanation Reference Debits

$

Credits

$

tivities associated with transactions. This information will help 

you justify your profit motive, and if you file as a business, it 

will help establish the extent of your participation for purposes 

of the passive loss rules, discussed in chapter 4. A journal and 

associated documents may provide a sufficient record of transactions for tax purposes, especially for landowners with limited management activities. All owners, however, should sort 

entries by tax categories: capital transactions, deductions from 

gross income, deductions from adjusted gross income, timber 

sale revenue, expenses of timber sale activities, and other 

transactions as appropriate.

A Forest Landowner’s Journal With 

Accounts

As your forest operations increase in complexity, a journal 

serves as a diary of day-to-day activities that are systematically 

transferred (posted) to accounts. Ledger accounts may be needed for each separate business or activity associated with forest 

land, but under certain circumstances the transactions for multiple activities can be combined for tax purposes. Professional 

tax advice may be needed to deal with this issue, especially 

regarding the passive loss rules that apply to businesses.

The number and kind of ledger accounts will vary with the 

details of your forest business. Accounts that are typically 

used by forest landowners include those specifically related to 

timber operations, plus those needed for any business. Only 

the basic accounts necessary to illustrate the records needed 

for forest-related activities are introduced here. To save space, 

repetitive costs (for example, annual property taxes) are shown 

in the journal only once.

Ledger Accounts

Capital Accounts

Forest land assets generally include (1) land, (2) timber, and 

(3) improvements. Each item that adds significantly to the 

value of the property should be reflected in an account for that 

item of property. Subaccounts usually are needed to adequately 

record transactions for management and tax purposes.

Land Account. The land account contains entries for the land 

and permanent land improvements (fig. 15.2). Permanent 

land improvements include things that have indefinite useful 

lives, such as roadbeds, land leveling, and impoundments. The 

basis for land and nondepreciable improvements should be 

maintained in separate subaccounts. The cost of these assets 

generally is not recovered until they are disposed of; they are 

nondepreciable. A casualty may occur, however, that results in 

the destruction of a roadbed or other permanent improvement. 

You would need to know the basis in the affected property—for 

example, the roadbed—to claim a loss from a casualty (see 

chapter 7).

Timber Accounts. Timber accounts include subaccounts for 

merchantable timber, young growth, and plantations.

Merchantable Timber Subaccount. One or more merchantable 

timber subaccounts may be kept, depending on your management goals, but a single account for average depletion is the 

simplest for small to medium-sized operations. The opening balance in the merchantable timber volume subaccount is the merchantable volume that could have been harvested at prevailing 

* Volume removed in sale of 438 thousand board feet (MBF) is adjusted in Merchantable Sawtimber Subaccount (fig. 15.3). 

Figure 15.1.—Evergreen Tree Farm: Journal (continued).

12/31/11 Temporary capital account 34 15,548

 Travel expense 276

 Property tax expense 1,280

 Interest expense 13,992

Election to capitalize carrying charges for 2006

12/31/11 Temporary capital account 35 15,548

 Merchantable sawtimber subaccount 14,041

 Pulpwood subaccount (not shown) 905

 Young growth subaccount 602

Allocation of carrying charges to timber accounts

12/31/11 Cash 36 1,200

 Hunting lease 1,200

Receipt of hunting lease payment from Laid Back Hunt Club
Forest Landowners’ Guide to the Federal Income Tax 105

utilization standards when the property was acquired (fig. 15.3). 

The opening balance in the associated merchantable timber basis 

account (dollar amount) is the portion of the original basis allocated to merchantable timber (see chapter 4).

Young-Growth Subaccount. When premerchantable timber is 

acquired, its allocable portion of the total acquisition cost or 

other basis on a per-acre basis is established in a young-growth 

subaccount (fig. 15.4). You are required to establish a younggrowth subaccount if the premerchantable timber makes a 

substantial contribution to the total value of the forest property 

(see chapter 4). The young-growth timber basis is transferred 

to a merchantable timber subaccount when the young growth 

becomes merchantable. Merchantability standards vary with 

local market conditions as well as by agreement with the IRS. 

An estimate of the volume per acre being transferred also is 

required, because the unit for measuring timber changes from 

area to volume. The transfer is made by increasing the basis and 

volume in the merchantable timber subaccount while reducing 

the basis in the young-growth subaccount by a corresponding amount. For example, in the case that follows, the basis of 

$22,323 on 60 acres in the Evergreen Tree Farm: young-growth 

subaccount (see figs. 15.1 and 15.4, ref. 29) is estimated to represent a merchantable volume of 1,350 cords when transferred to 

a merchantable pulpwood subaccount (not shown).

Plantation (Deferred Reforestation) Subaccount. A plantation 

subaccount, also referred to as a deferred reforestation subaccount, is similar to the young-growth subaccount. It is created 

when a new timber stand is established by artificial regeneration 

(planting or seeding) following a harvest or on land converted 

to timber. Such an account would include reforestation expenses that are not deducted or amortized under the provisions 

of section 194 of the Internal Revenue Code (IRC), as discussed 

in the following paragraph and in chapter 4.

Date Accounts and Explanation Reference Debits

$

Credits

$

Figure 15.2.—Evergreen Tree Farm: Land Account.

06/21/06 Allocation of Evergreen Tree Farm purchase cost to land: John Jones 

Tract (table 15.3)

5 59,537

09/15/11 Allocation of Lonesome Pine purchase cost to land 27 60,998

09/15/11 Adjusted balance (basis) carried forward 120,535

Date Accounts and Explanation Reference Debits

$

Credits

$

Figure 15.3.—Evergreen Tree Farm: Merchantable Sawtimber Subaccount: Volume Basis.*

06/21/06 Estimated merchantable volume of pine and hardwood sawtimber at date of purchase (see 

Evergreen Tree Farm cruise in table 15.2)

6b 650

01/02/08 Growth for 2006-08 (2 years: see cruise report, table 15.2) 80

01/02/08 Adjusted volume carried forward 730

12/31/08 Volume removed in sale 18b 438

12/31/08 Adjusted volume carried forward 292

09/15/11 Estimated volume on Lonesome Pine tract when purchased (table 15.2) 28b 750

09/31/11 Adjusted volume carried forward 1,042

* See fig. 15.6 for corresponding value.

Date Accounts and Explanation Reference Debits

$

Credits

$

Figure 15.4.—Evergreen Tree Farm: Young-Growth Subaccount.

06/21/06 Allocation of Evergreen Tree Farm purchase cost to young growth (60 acres of pine, see table 

15.3)

8 22,323

09/15/11 Allocation of Lonesome Pine purchase cost to young growth (40 acres, see table 15.3) 29 16,256

09/31/11 Transfer young growth to Merchantable Pulpwood Subaccount (value); volume estimated 

(cruised) to be 1,350 cords by E.Z. Cruiser

30 22,323

09/31/11 Adjusted balance carried forward 16,256

12/31/11 Election to capitalize carrying costs, proportional allocation 35 602

12/31/11 Adjusted balance carried forward 16,858
106 Forest Landowners’ Guide to the Federal Income Tax

Reforestation Account. This account is for tracking the cost 

basis of each qualified timber property (QTP) for which you are 

deducting or have deducted qualified reforestation costs under 

the provisions of IRC section 194. It reflects all qualified reforestation expenditures made on the QTP, the amount and nature 

(that is, by outright deduction or amortization) of all deductions 

taken, and the basis remaining in the QTP. Note that you must 

maintain the account until the timber on the QTP is harvested, 

even if there is no basis remaining. You are required to establish a separate reforestation account for each QTP for which 

you deduct outright up to $10,000 of qualified reforestation 

costs in a given year. Most forest owners, however, only need 

one reforestation account, which coincides with their entire 

forest ownership. Only owners who have divided their forest 

holdings into two or more blocks (see chapter 7) or who wish 

to deduct outright more than $10,000 of qualified reforestation 

expenses in a single year need more than one reforestation account. For additional information, see chapter 4, “Reforestation 

Tax Incentives” and IRS Notice 2006-20, part C2.

Depreciation Accounts. Depreciation accounts are established 

for equipment and other depreciable assets that are used in your 

forest activity (see fig. 15.5 and table 15.1, ref. 10). The cost of 

equipment is established in subaccounts according to the procedures discussed in chapter 4. Bridges, culverts, improved road 

surfaces, and fences are examples of depreciable land improvements for which subaccounts also may be established. They 

are depreciable because they wear out and have a determinable 

useful life. The cost of such items must be depreciated rather 

than deducted currently because their determinable useful life 

is greater than 1 year.

Expense Accounts

The number of expense accounts that is needed depends on 

the nature of your operations. Property taxes, travel expenses, 

and expenditures for various timber stand maintenance operations are typical of costs that you may incur (for example, see 

table 15.1). Maintenance operations include such activities as 

precommercial thinning, prescribed burning for hazard reduction, the purchase of small tools and supplies, and equipment 

maintenance. See chapter 4 for a discussion of expenses and 

their tax treatment, including the effect of the passive loss rules.

Capital Income Accounts

Timber normally generates capital gains or losses upon disposal 

(see the discussion on capital gains in chapter 5). Accounts 

associated with timber dispositions include: Timber Sale Revenue, Basis of Timber Sold, and Expenses of Sale (see table 

15.1 and Accounts 14, 15, and 16, respectively).

Ordinary Income Accounts

Ordinary income may be generated in many ways from forest land. In fact, most income other than that from the sale of 

timber or land will be ordinary income. Examples are hunting 

lease payments, selling firewood from logging residue, sale of 

wild nuts and herbs, and sale of pine straw (chapter 11). Because ordinary income may be important for offsetting management expenses, appropriate accounts should be established to 

record it. A Hunting Lease Account illustrates this point (table 

15.1, ref. 36).

General Business Accounts

You also need to establish accounts that are basic to any business. A Cash Account is used to handle revenues, pay bills, 

and make allocations to other business accounts. Categories of 

accounts for accumulating cash flows for business or tax decisions include: Interest Expense, Travel Expense, Vehicle Maintenance, Depreciation Expense, Accumulated Depreciation, 

Mortgage Payable, and Miscellaneous. These categories are 

shown in table 15.1 in abbreviated form to provide continuity 

with the forest accounts (figs. 15.2 through 15.6) in the comprehensive example.

Date Accounts and Explanation Reference Debits

$

Credits

$

Figure 15.5.—Evergreen Tree Farm: Depreciable Land Improvement Account.

06/21/06 Allocation of Evergreen Tree Farm purchase cost to equipment, a 90-foot wooden bridge (table 15.3) 9 13,399

12/31/06 Depreciation deduction for 2006 (Straight line: ($13,399 ÷ 15) x 7 ÷ 12 months) 10 521

12/31/06 Adjusted balance carried forward (Subsequent depreciation entries are not shown) 12,878
Forest Landowners’ Guide to the Federal Income Tax 107

 Reference Debits $ Credits $

A Comprehensive Example of 

Forest Land Purchases and 

Management

Records for Forest Land Purchases

John Jones purchased Evergreen Tree Farm from Bob Smith on 

June 1, 2006, for $275,000. Jones structures his timber management activities on the properties as a business in which he materially participates. The journal entries to record the acquisition of 

these properties, the allocation of acquisition cost to the respective 

capital accounts, the payment of annual operating expenses, the 

selling of timber, and the reforestation of harvested stands are 

shown in the Evergreen Tree Farm Journal (fig. 15.1). They are 

then transferred (posted) to their respective capital accounts 

(figs. 15.2 through 15.6) and to the general business accounts 

that are shown in abbreviated form in table 15.1.

An example of each type of transaction is briefly explained 

to illustrate the process of handling various cash flows and to 

indicate the tax treatment each should receive. E.Z. Cruiser, the 

consulting forester, prepared an appraisal of the Evergreen Tree 

Farm forest land property’s estimated value, table 15.2. His appraisal fee of $2,500 (fig. 15.1, ref. 1) and related legal fees of 

 Reference Debits $ Credits $

Table 15.1.—Evergreen Tree Farm accounts. Table 15.1.—Evergreen Tree Farm accounts (continued). 

1. Cash account

1 2,500

2 75,000

3 4,000

11 11,710

12 421

13 1,696

14 820

15 10,950

16 21,900

17 197,100

19 12,500

20 930

21 5,000

22 3,600

23 1,800

24 384,900

25 6,400

31 276

32 1,280

33 20,084

36 1,200

2. Temporary capital account

1 2,500

2 275,000

3 4,000

4 281,500

24 384,900

25 6,400

26 391,300

34 15,584

37 15,584

3. Mortgage payable

2 200,000

11 2,425

Bal Fwd 197,575

*******

Bal Fwd 177,531

33 6,092 *

4. Depreciation expense

10 521

5. Accumulated depreciation

10 521

6. Interest expenses

11 9,285 *

33 13,992

34 13,992

7. Travel expenses

31 276

34 276

8. Operating expenses

12 421

9. Truck maintenance

13 217

* Repetitious data are omitted.

******* missing entry.

10. Bridge maintenance

13 582

20 352

11. Road maintenance

13 897

20 578

12. Property tax expense

14 820

32 1,280

34 1,280

13. Timber stand improvement

23 1,800

14. Timber sale revenue

16 21,900

17 197,100

Bal Fwd 219,000

15. Cost of timber sold (basis)

18 97,100

16. Expenses of sale

15 10,950

17. Hunting Lease

36 1,200
108 Forest Landowners’ Guide to the Federal Income Tax

count (fig. 15.2, ref. 5). Similarly, the basis in merchantable 

timber is recorded in the Merchantable Sawtimber Subaccount 

(fig. 15.6, ref. 6a) and to the Merchantable Pulpwood Subaccount (ref. 7, not shown). A corresponding estimate of the 

merchantable volume of 650 MBF is reported in the Merchantable Sawtimber Subaccount (fig. 15.3, ref. 6b). Young growth 

is recorded in the Young-growth Subaccount (fig. 15.4, ref. 8). 

The basis of the bridge is posted to the Depreciable Land Improvement Account (fig. 15.5, ref. 9). It is depreciated using 

the straight line method with a 15-year recovery period and an 

$4,000 (fig. 15.1, ref. 3) are acquisition costs included in the total basis. They are added to the $275,000 purchase price (ref. 2) 

that was allocated to the capital accounts. The initial bookkeeping is handled with a temporary capital account that reflects the 

$281,500 total cost of the acquisition (ref. 4).

Allocation of the acquisition cost to the capital accounts is 

shown in table 15.3. Note that the appraised values are somewhat higher than the actual purchase price. Nevertheless, they 

provide the proportion that each account bears to the total value 

of the property. The basis in land is recorded in the Land AcAccount

Fair market value (FMV)

($)

Percent of total FMV

(%)

Allocation of 

acquisition cost

($)

Allocation of purchase 

price to original cost basis

($)

Table 15.3.—Allocation of Evergreen Tree Farm assets to capital accounts.

Land 80,000 21.15 1,375 58,162

Sawtimber 217,500 57.49 3,737 158,097

Pulpwood 32,800 8.67 564 23,843

Young growth 30,000 7.93 515 21,808

Bridge 18,000 4.76 309 13,090

Total 378,300 100.0 6,500 275,000

Description of assets Value

Evergreen Tree Farm (01/15/06)

1. 200 acres of average site land @ $400/acre $80,000

2. Merchantable pine and mixed hardwood sawtimber on 100 acres* 217,500

 Pine: 400 MBF @ $450/MBF = $180,000

 Hardwood: 250 MBF @ $150/MBF = $37,500

3. Pulpwood-pine and mixed hardwood on 40 acres* 32,800

 Pine: 880 cords @ $30/cord = $26,400

 Hardwood: 320 cords @ $20/cord = $6,400

4. Young-growth pine averaging 8 years old on 60 acres @ $500/acre 30,000

5. Used wooden bridge-90 feet (15-year recovery period with no salvage value) 18,000

Total estimated fair market value $378,300

Lonesome Pine Tract (08/01/11)

1. 120 acres of fair quality land @ $500/acre $60,000

2. Merchantable pine-hardwood sawtimber on 80 acres* 308,900

 Pine: 470 MBF @ $550/MBF = $258,500

 Hardwood: 280 MBF @ $180/MBF = $50,400

3. Young-growth pine averaging 5 years old on 40 acres @ $400/acre 16,000

Total estimated fair market value $384,900

* Submitted by E.Z. Cruiser, Registered Forester No. 424. MBF = thousand board feet.

Table 15.2—Summary of cruise (appraisal) reports for Evergreen Tree Farm and Lonesome Pine forest land purchases.

Date Accounts and Explanation Reference Debits

$

Credits

$

Figure 15.6.—Evergreen Tree Farm: Merchantable Sawtimber Subaccount: Cost Basis.

06/21/06 Allocation of Evergreen Tree Farm purchase cost to merchantable timber 6a 161,834

12/31/08 Allowable as basis for sale 18a 97,100

12/31/08 Adjusted basis carried forward 67,734

09/15/08 Allocation of Lonesome Pine purchase to merchantable timber (table 15.1) 28a 314,036

09/15/11 Adjusted basis carried forward 378,770

12/31/11 Election to capitalize carrying charges 35 14,041

12/31/11 Adjusted basis carried forward 392,811
Forest Landowners’ Guide to the Federal Income Tax 109

permanent files. QTP#1 was planted the following year for 

$3,600, for which no cost-sharing payment was received (fig. 

15.1, ref. 22). This expense is also deducted currently.

Jones spent $1,800 on timber stand improvement (TSI) operations in natural stands to maintain the quality and growth of 

selected crop trees. This deductible expense is shown in table 

15.1, Account 13, ref. 23.

On September 1, 2011, Jones purchased the adjoining tract 

known as “Lonesome Pine” for $384,900. The purchase price 

and allocation of capital are similar to the establishment of the 

original accounts. These additions show the adjustments to basis in the Land Account (fig. 15.2, ref. 27), Merchantable Timber Subaccount (fig. 15.4, ref. 28b, and fig. 15.6, ref. 28a), and 

Young-growth Subaccount (fig. 15.4, ref. 29).

When the young growth in the original purchase reaches merchantability in 2011, it is transferred from the Young-growth 

Subaccount (fig. 15.4, ref. 30) to the Merchantable Pulpwood 

Subaccount (not shown). Note that this option is chosen by 

Jones based on his timber management goals. He is keeping the 

merchantable accounts separate by products (that is, sawtimber 

and pulpwood), although they could have been combined into a 

single merchantable timber subaccount.

In 2011, Jones’ fortunes were not good, resulting in zero taxable 

income. To avoid the loss of deductible expenses, he elected to 

capitalize as carrying charges the costs for travel (fig. 15.1, ref. 

31), property taxes (ref. 32), and business interest (ref. 33). The 

total of $15,548 is proportionately allocated to the timber accounts (fig. 15.1, ref. 35).

The diversity of Evergreen Tree Farm, including mixtures of 

timber species, various age classes, and openings caused by 

harvesting, offers good hunting prospects. Jones leased the 

property for 5 years to the Laid Back Hunt Club for $1,200 

per year ($4 per acre per year). Most members are neighbors, 

and the agreement includes clauses for insurance coverage, fire 

protection, and prevention of trespass. The first payment is received at the end of 2011 (table 15.1, Account 17, and fig. 15.1, 

ref. 36).

Blank ledger forms for beginning a forest land journal with 

accounts for merchantable timber, young growth, and reforestation can be found in most business supply offices. These forms 

are the minimum needed for efficiently recording information 

in forest land capital accounts. Other general business accounts, 

such as those suggested in table 15.1, should be added as needed to reflect the complexity of your forest land operations.

assumed salvage value of zero. The first year’s depreciation 

deduction is shown in table 15.1 (Account No. 4, ref. 10) and 

accumulated depreciation is shown in table 15.1 (Account 

No. 5, ref. 10). The information in these accounts should be 

used to complete IRS Form T (Timber), Part I: Acquisitions, to 

be filed in Jones’ permanent records.

The $200,000 business loan on Evergreen Tree Farm is amortized at 8 percent over 20 years. The interest expense, which is 

deductible (fig. 15.1, ref. 11), and reduction of principal, which 

is not deductible (table 15.1, Account 3), are recorded in separate accounts.

Records for Forest Land Management

Various operating and maintenance expenses for the Evergreen 

Tree Farm also are shown in table 15.1. These expenses include 

supplies (Account 8, ref. 12), maintenance (Account 9, ref. 13), 

and property taxes (Account 12, ref. 14). See chapter 4 for a discussion of forest management and operating expenses, including treatment of the business interest discussed previously.

When Jones decided to sell timber in 2008, he asked his consulting forester to prepare and market the sale for a fee of 

$10,950, a 5-percent commission (fig. 15.1, ref. 15). To qualify 

the gain for treatment as a long-term capital gain, the timber 

is disposed of under IRC section 631(b). Either a sale-by-theunit contract (also called a pay-as-cut contract) or a lump-sum 

contract qualifies. The sale revenue consisted of a bid deposit 

of $21,900 (10 percent) and an advance payment of $191,100. 

They are recorded in Account 14, Timber Sale Revenue (table 

15.1, refs. 16 and 17, respectively). The cost of timber sold 

(allowable basis) is calculated on IRS Form T (Timber), Part 

II: Timber Depletion, using information from the Merchantable 

Sawtimber Subaccount (figs. 15.3 and 15.6). Cost of timber 

sold is subtracted from gross sale revenue in calculating net 

taxable gain or loss (chapter 5). This amount of $97,100 (ref. 

18a) is recorded in Account 15, Cost of Timber Sold (table 

15.1). IRS Form T (Timber), Part III: Profit or Loss From Land 

and Timber Sales, is also completed but was not filed with the 

tax return because Jones makes only occasional timber sales 

for which the filing of Part III is not required.

The harvested 60 acres are site prepared at a cost of $12,500 

(fig. 15.1, 19). Jones receives a cost-sharing payment of $5,000 

(ref. 21), which he elects to exclude from his income under 

IRC section 126. He designates this project as QTP#1 and 

elects to deduct the remaining $7,500 reforestation expense 

currently. IRS Form T (Timber), Part IV: Reforestation and 

Timber Stand Activities, is completed and placed in the 
110 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 111

Glossary

A

account. A record of all transactions that affect one segment of 

an investment or business. Examples include a cash account, 

land account, timber account, and depreciation account. Also 

see “capital account” and “ledger.”

accrual method. A method of accounting where expenses are 

deducted when they are incurred, whether or not they actually 

are paid at that time, and revenue is reported when it is earned, 

whether or not it actually is received at that time. Businesses 

that ordinarily maintain an inventory of goods for sale to customers are required to use the accrual method of accounting. 

Also see “cash method.”

active income. Income generated by a trade or business activity in which the taxpayer materially participates. Also see 

“business,” “income,” “material participation,” and “passive 

income.”

adjusted basis. Original basis, minus any reductions made 

because of amortization, depletion, depreciation, or losses 

claimed, plus any additions made because of carrying charges, 

additions, or improvements to the asset. Also see “amortize,” 

“basis,” “capital asset,” “carrying charge,” “depletion,” “depreciation,” “loss,” and “original basis.”

adjusted gross income (AGI). Taxable income from all 

sources, minus adjustments for contributions to tax-preferred 

retirement and medical savings accounts, self-employment 

taxes and health insurance costs, moving expenses, alimony 

payments, qualified reforestation expenses for forest land held 

as an investment, and so forth. Personal deductions and the 

applicable standard or itemized deductions are subtracted from 

AGI to determine taxable income. Also see “income” and “taxable income.”

afforest. To establish trees on a previously unforested area by 

means of planting trees, spreading tree seeds, or seeding-in 

from adjacent trees. The term reforestation, as used in reference to the tax treatment of the costs of doing so, includes afforestation costs. Also see “reforest.”

allowable basis. That portion of the adjusted basis that can 

be offset against the revenue received when timber is sold or 

otherwise disposed of. Allowable basis = Depletion Unit x Volume Disposed Of. Also see “adjusted basis,” “depletion,” and 

“depletion unit.”

alternate valuation date. See “valuation date.”

alternative minimum tax (AMT). The amount, if any, by 

which a taxpayer’s tentative minimum tax for a tax year exceeds his or her regular tax for the tax year. The Internal Revenue Code defines tentative minimum tax for various categories 

of taxpayers. Also see “Internal Revenue Code (IRC).”

alternative rate of return (ARR). The interest rate earned 

by the best investment available to an investor other than the 

investment under consideration. ARR—adjusted as appropriate 

for taxes and differences in the length and risk of the investment—is the appropriate interest rate to use in evaluating or 

comparing investments.

amortize. To deduct a qualifying capital cost over a specified 

period of time. For example, under IRC section 194, qualified 

reforestation costs that are not deducted currently or that exceed 

the maximum annual deduction allowed can be amortized over 

8 tax years. Also see “capital cost,” and “establishment cost.”

appraisal. The process of estimating the fair market value (FMV) 

of an asset. An appraisal is specific as to time and location.

artificial regeneration. Reforestation accomplished by means 

of planting trees or spreading tree seeds, either by hand, machine, or aerial seeding. The process nearly always involves 

site preparation using prescribed burning, chemicals, and/or 

mechanical equipment. Also see “natural regeneration,” “prescribed burn,” “reforest,” and “site preparation.”

asset. See “capital asset.”

average depletion unit. If timber of various grades and species from more than one tract is combined in a single timber 

account, the depletion unit will be an average of all the timber 

in the account. Also see “depletion unit” and “species or value 

depletion unit.”

B

bargain sale. The intentional sale of an asset or service for less 

than its FMV value on the date of the sale. The difference between the price paid by the buyer and the FMV is deemed to be 

a gift. Also see “conservation easement.”

basis. In general, the amount invested in a capital asset acquired 

by purchase. The basis of property acquired by other means is 

determined by the method of acquisition (see chapter 4, 
112 Forest Landowners’ Guide to the Federal Income Tax

“Original and Adjusted Basis”). Also see “adjusted basis,” “cost 

basis,” “original basis,” “stepped-up basis,” and “volume basis.”

block. A block is the operational unit a forest owner uses to 

keep track of the adjusted basis of all his or her timber in a 

given market area. The timber basis account for a block may be 

divided into two or more subaccounts based on tree species or 

species group, timber product, or timber character or accessibility. Alternatively, an owner may establish separate blocks by 

geographical or political boundaries or by logical management 

areas (establishing multiple blocks may, however, limit the 

deduction the owner can take when timber is sold or otherwise 

disposed of, or following a loss event). Timber acquired under 

a cutting contract is not part of any block, and should be carried in a separate account. Also see “allowable basis,” “basis,” 

“depletion deduction,” “condemnation,” and “loss.”

board foot (bd. ft.). The standard unit of measure for trees and 

logs of appropriate size and species to be sawn into lumber, and 

of the lumber or other products cut from them. A board foot 

is 1 foot square by 1 inch thick. Tables based on various log 

rules are used to estimate the board foot volume that trees and 

cut logs of various lengths and diameters will yield. Also see 

“cord,” “log rule,” “MBF,” and “scaling.”

boot. In a property exchange, cash and other nonqualifying 

property received that does not qualify for tax deferral (chapter 6). Also see “like-kind exchange.”

business. In general, an activity carried out for the realization 

of a profit and characterized by regular transactions. Neither the 

IRC nor the regulations provide a precise definition of the term 

“trade or business.” Also see “investment,” “material participation,” “passive,” and “profit.”

C

capital account. An account used to keep track of the basis and 

quantity of capital assets. Also see “account,” “basis,” “capital 

asset,” “equipment account,” “land account,” and “timber account.”

capital asset. In general, income-producing property used for 

an investment or in a trade or business, including land, timber, 

buildings, and equipment. “Capital asset” has a more specific 

meaning for the purpose of determining capital gain treatment 

under IRC section 1221 (see chapter 5, “Sale of Standing Timber for a Lump Sum”). Also see “capital account.”

capital cost. The cost to acquire a capital asset; basis. Capital 

costs include those that are recoverable through allowances for 

amortization, depletion, and depreciation, as well as those that 

are recoverable only when the asset is sold or otherwise disposed of. Also see “amortize,” “basis,” “capital asset,” “depletion,” and “depreciation.”

capital gain (or loss). Net income realized on the sale or 

exchange of a capital asset. A capital gain (or loss) is treated 

differently for tax purposes from ordinary income or the profit 

realized from the operation of a business. Also see “business,” 

“capital asset,” “income,” “ordinary income,” “profit,” and 

“taxable gain (or loss).”

capitalize. The process of adding to a capital account the cost 

of acquiring a capital asset, or the cost of making improvements 

or additions to a capital asset already in place. Depending on the 

nature of the asset, the capitalized amount may be recoverable 

through amortization, depletion, depreciation, or only through 

sale or exchange. Also see “amortize,” “capital account,” “capital asset,” “capital cost,” “depletion,” and “depreciation.”

carrying charge. A regularly recurring ordinary and necessary 

expense associated with carrying on a trade or business or an investment, such as interest, taxes, and insurance. In the case of forest land, carrying charges may be deducted annually, or in years 

the forest does not produce income from any source, capitalized 

at the owner’s discretion (see chapter 4, “Currently Deductible 

Costs: Operating Expenses and Carrying Charges”). Also see 

“business,” “capitalize,” “deduct,” and “operating expense.”

cash method. A method of accounting where expenses are 

deducted when they are actually paid and revenue is reported 

when it is actually or constructively received. Also see “accrual method.”

casualty. Damage, destruction, or loss of property resulting 

from an identifiable natural or outside event that is sudden, unexpected, and unusual, as from an earthquake, flood, fire, violent storm, volcanic eruption, etc. Forest owners whose timber 

is damaged or destroyed by a casualty event may be eligible to 

take a loss deduction on their Federal income tax (see chapter 7, 

“Casualty”). Losses that are not sudden, as from disease, insect 

infestation, drought, or a combination of factors, are not casualty 

losses but may qualify as noncasualty losses. Also see “condemnation,” “involuntary conversion,” “loss,” “noncasualty loss,” 

and “theft loss.”

community property. Property owned by either or both 

spouses that is considered under State law to be owned equally 

by both spouses. In general, community property is all property acquired during marriage by either spouse except property 

received by inheritance or gift. The nine community property 

States are Arizona, California, Idaho, Louisiana, Nevada, New 

Mexico, Texas, Washington, and Wisconsin.
Forest Landowners’ Guide to the Federal Income Tax 113

condemnation. The legal process by which private property is 

taken for public use by a unit of government, political subdivision, or private organization that has the legal power to take it, 

without the consent of the owner, but with payment of compensation. Forest owners whose land or timber is condemned, 

or who sell it under threat of condemnation, may be eligible 

to take a loss deduction on their Federal income tax (see chapter 7, “Condemnation”). Also see “casualty,” “condemnation 

award,” “involuntary conversion,” and “loss.”

condemnation award. The money the owner of condemned 

property is paid or the value of other property received for 

the property when it is condemned or the owner sells it under 

threat of condemnation. Also see “condemnation.”

conservation easement. The donation or sale of one or more 

attributes of land ownership; for example, the right to subdivide or develop the land, usually to a government agency or a 

land trust. Removal of the attribute(s) of ownership may reduce 

the value of the land, resulting in lower property taxes. Furthermore, an easement made in perpetuity, by an outright gift 

or bargain sale, may qualify for Federal income and estate tax 

benefits (see chapter 8, “Conservation Easements”). Also see 

“bargain sale.”

consulting forester. A forester available for hire on a contract 

basis. Consulting foresters typically charge a daily fee, plus 

expenses, for some services and provide other services on a 

fixed contract basis. Some charge a fixed percentage of the sale 

price of timber to provide services required in connection with 

a timber sale. Also see “extension forester,” “forester,” “industry forester,” and “service forester.”

conversion cost. See “cost of conversion.”

co-ownership. The undivided ownership of property by two or 

more persons or legal entities. The laws governing co-ownership vary widely from State to State, but the three basic forms 

of co-ownership are tenancy in common, joint tenancy, and 

tenancy by the entirety. Also see “fee owner,” “joint tenancy,” 

“tenancy in common,” and “tenancy by the entirety.”

cord. A unit of measure used in conjunction with trees of a 

suitable size to be converted into pulpwood, small dimension 

lumber, firewood, or other products that are not measured in 

terms of board feet. A standard cord is a unit of stacked wood 

measuring 4 feet by 4 feet by 8 feet. Also see “board foot,” 

“MBF,” and “pulpwood.”

corporation. A separate legal entity charted under State law 

and owned by its shareholders, whose ownership interests are 

represented by shares of stock. Also see “family limited partnership (FLP),” “limited liability company (LLC),” “limited 

partnership,” “partnership,” “sole proprietorship,” and “subchapter S corporation.”

cost basis. (a) A term used to refer to the basis of an asset, regardless of the source of the original basis. (b) For timber, the 

cost element of timber basis, which together with the volume 

element, is used to determine the depletion unit. Also see “basis,” “capital asset,” “depletion unit,” and “volume basis.”

cost of acquisition. The sum of all costs associated with the 

acquisition of a capital asset. As well as the purchase price, the 

cost of acquisition of a tract of forest land might include the 

cost of a cruise to determine the timber volume, a survey of the 

boundaries, a title search, legal fees, and closing costs. Also see 

“capital asset” and “timber cruise.”

cost of conversion. The cost of converting standing trees into 

a salable product, such as firewood, pulpwood, logs, lumber, or 

railroad ties. In the case of producing lumber, for example, the 

conversion cost would include the cost incurred to cut down 

(fell) the trees, remove the limbs (limb), cut the tree stems into 

logs (buck), move the logs to a point where they can be loaded 

onto a truck (skid), transport the logs to a processing mill 

(haul), and convert them into lumber for sale. Also see “IRC 

section 631(a) transaction.”

cost of sale. A cost directly associated with the sale or other 

disposal of timber or another asset, such as advertising, professional services, timber cruising, surveying, legal fees, and so 

forth. Costs of sale and basis in the asset sold are subtracted 

from the sale proceeds to determine the taxable gain or loss. 

Also see “basis,” “proceeds,” “taxable gain (or loss),” and “timber cruise.”

credit. See “tax credit.”

cruise. See “timber cruise.”

D

date of disposal. The date of disposal for timber differs according to how it is sold or disposed of. For timber sold outright 

(lump-sum)—whether under the provisions of IRC section 1221 

or IRC section 631(b)—the date of disposal is the time ownership of the timber changes hands. Otherwise the date of disposal is when, in the ordinary course of business, the quantity of 

timber cut is first definitely determined (see chapter 5, “Timber 

Sale Receipts”). Also see “capital gain (or loss),” “disposal,” 

“outright timber sale,” “pay-as-cut timber sale,” “IRC section 

631(a) transaction,” and “IRC section 631(b) disposal.”
114 Forest Landowners’ Guide to the Federal Income Tax

deduct. To recover an expense by subtracting it from taxable 

income in the year it is paid or incurred. In the case of a business, the deduction is taken “above the line” (subtracted from 

gross income). In the case of an investment, only qualified 

reforestation expenses are taken “above the line;” all other 

deductions are itemized and subtracted from taxable income. 

Also see “deductible item” and “taxable income.”

deductible item. An expense a taxpayer can deduct when 

calculating his or her Federal income tax. Deductible items 

include the cost of tools of short life or small cost, operation 

and maintenance costs, taxes, interest, insurance premiums, 

and salaries or other compensation for services rendered by 

others—except for services related to the purchase of timber 

or forest land (see chapter 4, “Capital Costs”), reforestation or 

afforestation (see chapter 4, “Reforestation Tax Incentives”), or 

a timber sale (see chapter 5, “Timber Sale Receipts”). Also see 

“deduct.”

deferred reforestation subaccount. Also called a plantation 

subaccount, a capital account used to record expenses for artificially planting or seeding trees on a specified tract of land that 

are not deducted currently or amortized. When the timber on 

the tract becomes merchantable, the cost basis in the account 

is transferred to the merchantable timber subaccount. Also see 

“block,” “capital account,” “cost basis,” “merchantable timber 

subaccount,” “qualified timber property (QTP),” “timber account,” and “young-growth subaccount.”

depletion. The using up or wasting away of a natural resource. 

In the case of timber, depletion is the recovery of the owner’s 

basis in the timber and applies when the timber is harvested 

and the logs cut from the timber are sold or used in the owner’s 

business. Also see “basis,” “depletion unit,” and “depletion 

deduction.”

depletion allowance. See “allowable basis” and “depletion 

deduction.”

depletion deduction. The portion of the adjusted basis that 

can be offset against the revenue received when timber is cut 

and resulting product is sold or used in the harvester’s trade or 

business. Depletion Deduction = Depletion Unit x Volume Cut. 

Also see “adjusted basis,” “depletion,” and “depletion unit.”

depletion unit. A measure of basis per unit of volume in a 

timber account at a particular point in time. Depletion Unit 

= Adjusted Basis ÷ Total Timber Volume. Also see “average 

depletion unit,” “cost basis,” “depletion deduction,” “timber 

account,” and “species or value depletion unit.”

depreciable improvement. An improvement to land or equipment that has a determinable useful life and thus can be depreciated. Depreciable improvements to land include buildings and 

other permanent structures and their components, bridges, culverts, fences, temporary roads, and the surfaces of permanent 

roads. Also see “depreciation” and “useful life.”

depreciation. The process by which the basis of a capital asset 

with a determinable useful life is recovered as the asset is used 

for the production of income. Capital assets associated with 

forest ownership whose basis is recovered through depreciation 

include equipment, buildings, fences, temporary roads, and the 

surfaces of permanent roads. Also see “basis,” “capital asset,” 

“depreciable improvement,” “income,” “modified accelerated 

cost recovery system,” and “useful life.”

disposal. Timber is disposed of when the owner sells, cuts, or 

exchanges the timber or otherwise parts with it. The date of disposal, which is important for determining whether income from 

the transaction qualifies for treatment as a long-term capital 

gain, differs according to how the timber is sold or disposed of. 

Also see “capital gain (or loss),” “date of disposal,” “outright 

timber sale,” “pay-as-cut timber sale,” “IRC section 631(a) 

transaction,” and “IRC section 631(b) disposal.”

E

economic interest. A concept developed by the U.S. Supreme 

Court and incorporated into Treasury Regulations, subchapter 

A, section 1.611-1(b) to determine which taxpayers in addition 

to the fee owner of property qualify for certain tax benefits. An 

economic interest is retained in every case in which the taxpayer 

has acquired by investment any interest in timber and secures, 

by any form of legal relationship, income derived from the severance of the timber to which the taxpayer must look for a return 

of capital. Also see “income” and “IRC section 631(b) disposal.”

equipment account. A capital account where the cost basis 

of depreciable machinery and equipment is recorded. Also see 

“capital account” and “cost basis.”

establishment cost. The cost required to reforest or afforest an 

area with trees of desired species and capable of surviving. Included are the costs of site preparation, seedlings or tree seeds, 

and hired labor, including supervision. The Internal Revenue 

Service (IRS) takes the position that establishment cost also 

includes the cost of brush and weed control essential to the survival of a plantation and weed and hardwood control essential to 

the survival of a natural stand. IRC section 194 provides for the 

deduction of up to $10,000 per year of qualified establishment 
Forest Landowners’ Guide to the Federal Income Tax 115

costs for each qualified timber property (QTP); amounts more 

than $10,000 per year may be recovered through amortization 

or depletion. Also see “afforest,” “amortize,” “capital cost,” 

“deduct,” “depletion,” “qualified timber property (QTP),” “reforest,” “site preparation,” and “stand.”

estate. A separate legal entity created by process of law to hold 

and manage the assets of a decedent while the assets are being 

administered and distributed under a court’s jurisdiction. In 

property law, “estate” generally refers to the length of time that 

an owner’s interest in property lasts. Also see “valuation date.”

even-aged. A stand or forest in which all or nearly all the timber trees are approximately the same age. Also see “stand,” 

“timber” and “uneven-aged.”

excludable. An item if income—for example part or all of a 

payment from a qualifying Federal or State cost-sharing program (see chapter 5, “Government Program Payments”)—that 

a taxpayer may elect to exclude from his or her taxable income. 

Also see “exclude,” “income,” and “taxable income.”

exclude. To elect not to include a qualifying item in gross 

income. For example, forest owners may elect to exclude a 

calculated part of certain cost-sharing payments received from 

Federal or State agencies. Note that qualifying income you 

elect to exclude still must be reported (see chapter 5, “Determining the Excludable Amount”). Also see “excludable” and 

“taxable income.”

expense. See “deduct” and “operating expense.”

extension forester. A forester employed by a State Cooperative Extension Service under the auspices of the U.S. Department of Agriculture, Cooperative State Research, Education, 

and Extension Service. Extension foresters usually are based 

at the State’s land-grant university. Their primary function is 

to provide forestry-related educational materials, workshops, 

demonstrations, and similar services. In some States, extension 

foresters are available for a limited amount of on-the-ground 

assistance to individual landowners. Also see “consulting forester,” “forester,” “industry forester,” and “service forester.”

F

fair market value (FMV). The price at which an asset—standing trees, for example—would change hands in a transaction 

between a willing, informed buyer and a willing, informed 

seller. In the absence of a sale, FMV generally is determined 

by appraisal. In the specific case of an IRC section 631(a) 

transaction, the timber must be valued as it existed on the first 

day of the owner’s tax year, regardless of any changes that 

subsequently happen to it or to the market (see chapter 5, “IRC 

Section 631(a) Cutting of Standing Timber With an Election to 

Treat as a Sale”). Also see “IRC section 631(a) transaction.”

family limited partnership (FLP). A type of limited partnership controlled by members of a family. An FLP typically is 

created by senior family members (parents or grandparents), 

who contribute assets such as forest land to the partnership in 

exchange for a small general partnership interest and a large 

limited partnership interest. The senior family members then 

retain the general partnership interest—along with managerial 

control—while transferring part or all of the limited partnership 

interest to younger family members (children or grandchildren), 

often through gifts, which may be discounted for minority interest and/or lack of marketability. In addition to its advantages 

as an estate-planning tool, an FLP may be useful in interesting 

young family members in keeping forest land in the family 

and involving them in its management. Also see “corporation,” 

“limited liability company (LLC),” “limited partnership,” “partnership,” “sole proprietorship,” and “subchapter S corporation.”

farm. In general, a trade or business that produces farm income. Specific sections of the IRC more precisely define farming for the purposes of those particular sections. Some sections 

specifically exclude the production of timber from the definition 

of farming. Also see “Farm income.”

farm income. Income received from the sale of agricultural 

commodities such as grain, livestock, fruit, nuts, vegetables, 

dairy products, poultry, and fish. Also see “farm” and “income.”

fee owner. Refers to the person holding fee simple title (estate) 

to real property, often referred to as the outright owner. Fee 

ownership is the most complete ownership one can have in 

real property, compared with the holder of a shared (as with 

co-ownership) or leasehold interest. Also see “co-ownership,” 

“estate,” and “leasehold interest.”

felled timber. Timber in trees that have been cut down (severed) and are lying on the ground. Used alone, the term timber

refers to standing trees. Also see “timber.”

for profit. Refers to whether a person’s motivation and actions 

indicate they are engaged in an activity with the intention to 

make a profit. Under the so-called hobby-loss rule, an activity 

generally is presumed to be for profit if it makes a profit in at 

least 3 of the last 5 tax years including the current year. Profit, 

however, includes appreciation in the value of assets used in an 

activity. This concept is particularly relevant to timber, which 

appreciates in value through physical growth and enhanced 

quality over long periods of time. Also see “profit.”
116 Forest Landowners’ Guide to the Federal Income Tax

forester. A person trained in the study and practice of managing forest land and associated resources. In some States, people 

holding themselves out as professional foresters must be certified and licensed to practice in that State. Also see “consulting 

forester,” “extension forester,” “industry forester,” and “service 

forester.”

G

gain. See “realized gain,” “recognized gain,” and “taxable gain 

(or loss).”

gift. The giving of money or property by one person (the donor) 

to another (the recipient or donee) during the donor’s lifetime.

girdling. The process of encircling the trunk of a tree with a cut 

that stops the flow of nutrients between the leaves and roots, 

resulting in the death of the tree.

H

harvest. An intermediate or final cutting to remove merchantable trees for sale or for use in the owner’s trade or business. 

All the merchantable trees in a stand or tract can be harvested, 

or only certain species, certain sizes, or individually marked 

trees. Also see “merchantable timber,” “outright timber sale,” 

“pay-as-cut timber sale,” “IRC section 631(a) transaction,” and 

“stand.”

holding period. The period of time a capital asset is owned, 

measured from the date of acquisition to the date of disposal. 

The date of disposal for timber differs according to how it is 

sold or disposed of. Income from the sale or disposal of assets 

considered to be held more than 1 year can qualify for treatment as a long-term capital gain. Also see “capital gain (or 

loss),” “date of disposal,” “income,” “outright timber sale,” 

“pay-as-cut timber sale,” “IRC section 631(a) transaction,” and 

“IRC section 631(b) disposal.”

I

income. Money or its equivalent received during a given period 

of time in exchange for the performance of labor or services, 

from the sale of goods or property, or as profit from an investment or the operation of a business. Among other things, 

income includes wages, salaries, and tips; interest; dividends; 

business income; capital gains; retirement payments; rents, royalties, and profits; and farm income. Also see “active income,” 

“adjusted gross income (AGI),” “business,” “capital gain (or 

loss),” “farm income,” “investment,” “ordinary income,” “passive income,” “portfolio income,” “profit,” “recognized gain,” 

“taxable gain (or loss),” and “taxable income.”

independent contractor. A person who provides specified 

services under a form of contract that does not establish an 

employer-employee relationship. The IRS uses specific guidelines to distinguish between an employee and an independent 

contractor. Both contractual provisions and the actual relationship between the parties are considered (see chapter 9, “Employment Status”).

industry forester. A forester employed by a timber growing 

or processing company. Industry foresters frequently provide 

technical assistance in conjunction with timber purchases from 

private landowners. Some companies also have formal programs 

through which they make foresters available to assist landowners in all aspects of timber management. Also see “consulting 

forester,” “extension forester,” “forester,” and “service forester.”

information return. An IRS form used by a business or government agency to report tax-related transactions with other 

businesses or individual taxpayers. Examples of information 

returns include IRS Form 1065: U.S. Return of Partnership 

Income, filed by partnerships, and IRS Form 1099-S: Proceeds 

From Real Estate Transactions, filed by purchasers of timber in 

an outright (lump-sum) sale (see chapter 5, “Information Returns”). Also see “outright timber sale” and “partnership.”

in-growth. The growth of timber from premerchantable to 

merchantable size or from a smaller, lower valued product to a 

larger, higher valued product. Also see “merchantable timber” 

and “premerchantable timber.”

installment sale. A sale in which the seller receives at least one 

payment after the tax year in which the disposition occurs (see 

chapter 9, “Installment Sales”). Also see “disposal.”

intermediate treatment. A term for management practices 

used in a timber stand between the time it is established and 

the time it is harvested. For example, a prescribed burn or a 

thinning may be used to release timber trees from competing vegetation; fertilization may be used to sustain their rate 

of growth; and pruning or timber stand improvement may be 

used to improve their form, composition, or condition. Also 

see “prescribed burn,” “stand,” “thinning,” and “timber stand 

improvement (TSI).”

Internal Revenue Code (IRC). Refers to the Internal Revenue 

Code of 1986, as amended. The IRC is the written statutory tax 

law enacted by the U.S. Congress. The U.S. Department of the 

Treasury issues regulations to interpret the IRC. Revenue rulings published by the IRS provide information and guidance in 

applying the tax law and regulations correctly and uniformly. 

Also see “Internal Revenue Service (IRS),” “regulations,” and 

“revenue rulings.”
Forest Landowners’ Guide to the Federal Income Tax 117

Internal Revenue Service (IRS). The agency of the U.S. 

Department of the Treasury responsible for administering and 

enforcing the IRC and for collecting Federal taxes. Also see 

“Internal Revenue Code (IRC).”

investment. An activity engaged in with the intention of realizing a profit, but not rising to the level of a trade or business. 

Management expenses for timber held as an investment are recovered as miscellaneous itemized deductions, deductible only 

to the extent they exceed 2 percent of adjusted gross income; 

property taxes are deductible against income from any source; 

and interest on indebtedness is deductible only to the extent 

of net investment income. Also see “adjusted gross income 

(AGI),” “business,” “income,” and “profit.”

involuntary conversion. The conversion of an asset for money 

or other property that results from a cause beyond the control 

of the owner, such as a casualty, theft loss, condemnation, or 

noncasualty loss. Also see “casualty,” “condemnation,” “loss,” 

“noncasualty loss,” and “theft loss.”

IRC section 631(a) transaction. If a forest landowner cuts 

timber and converts it into products for sale and specifically 

elects to treat the process as an IRC section 631(a) transaction, the proceeds that result from holding the standing timber 

qualify as a capital gain under IRC section 1231—exactly as if 

the owner had sold it at FMV—and the value added by cutting 

the timber and converting it into products is ordinary income. 

Also see “capital gain (or loss),” “conversion cost,” “date of 

disposal,” “outright timber sale,” “ordinary income,” “pay-ascut timber sale,” and “IRC section 631(b) disposal.”

IRC section 631(b) disposal. When timber held for use in a 

trade or business is disposed of under the provisions of IRC 

section 631(b), either by outright sale or under a contract with 

economic interest retained (pay-as-cut contract). The income 

from such a disposal is taxable as a capital gain, even if the 

timber is held primarily for sale to customers. Also see “capital 

gain (or loss),” “date of disposal,” “income,” “outright timber 

sale,” “pay-as-cut timber sale,” and “IRC section 631(a) transaction.”

J

joint tenancy. A form of co-ownership wherein, upon the death 

of a joint tenant, that person’s undivided ownership interest 

passes to the surviving joint tenant(s). Also see “co-ownership,” “tenancy in common,” and “tenancy by the entirety.”

journal. A record of business transactions recorded in chronological order. A journal entry usually includes the date, a description of the transaction, the names of the parties involved, 

the amount of a transaction, and the accounts affected. Also see 

“account” and “ledger.”

L

land. For tax purposes, land includes the land itself, plus any 

permanent improvements made to the land, for example, land 

leveling or the roadbeds of permanent roads. Also see “land 

account.”

land account. A capital account that records the basis of land, 

plus any permanent improvements made to it. The IRS takes the 

position that the cost of defending title to land must be capitalized in the land account. Also see “capital account,” “capitalize,” “cost basis,” and “land.”

leasehold interest. A limited interest, created by a written lease, 

to enjoy exclusive possession and use of property or another 

asset for a set length of time. A leasehold interest is not of the 

same character or nature as fee ownership; however, a longterm leasehold interest can be mortgaged or sold as a physical 

asset, and a leasehold interest with 30 years or more remaining 

is considered equivalent to fee ownership in a like-kind exchange. Also see “fee owner,” “lessee,” “lessor,” and “like-kind 

exchange.”

ledger. A book of accounts. Also see “account” and “journal.”

legatee. Term for a person designated to receive property under 

the provisions of a will. Note that “heir,” commonly used with 

the same meaning, is the term for a person entitled to receive 

property under the laws of the State where the decedent lived or 

owned property.

lessee. The person or entity to whom a lease is made, for example, a timber company that leases land from a forest landowner 

to grow and harvest timber, or a hunting club that leases land 

for hunting game. Also see “leasehold interest” and “lessor.”

lessor. The person granting a lease, for example a forest landowner who leases land to a timber company or hunting club. 

Also see “leasehold interest” and “lessee.”

life estate. A limited property interest wherein title to designated property is transferred, but the transferor or other designated person (the life tenant) retains the right to use, enjoy, and 

receive income from the property for the duration of his or her 

life. The life tenant has responsibilities regarding the property, 

including paying mortgage interest and property taxes on it, 

keeping it in good condition, and protecting it. Upon the death 

of the life tenant, title transfers to the person or entity designated when the life estate was established.
118 Forest Landowners’ Guide to the Federal Income Tax

like-kind exchange. An exchange of ownership interests in 

properties considered to be like-kind properties under IRC section 1031. If certain other requirements are met, the transaction 

qualifies as a nontaxable exchange (chapter 6). The like-kind 

exchange provisions apply only to properties held for productive use in a trade or business or for investment. They do not 

apply to stocks, bonds, notes or other securities, to partnership 

interests, to property held primarily for sale to customers, or to 

property acquired solely for exchange purposes. Also see “business” and “investment.”

limited liability company (LLC). A hybrid entity that combines features of a corporation and a partnership. The liability 

of LLC members is limited to the amount of their investment, 

as with a corporation. Income, however, passes through to 

members for income tax purposes, as with a partnership. State 

law usually permits an LLC to customize the distribution of 

cash and property and the allocation of profits and losses among 

its members. As well, an LLC member can materially participate in the LLC’s business activities, so that income and losses 

passed through to the member are considered active rather than 

passive. In addition to its advantages as a form of organization, 

an LLC may be useful in interesting young family members in 

keeping forest land in the family and involving them in its management. Also see “corporation,” “family limited partnership 

(FLP),” “limited partnership,” “loss,” “partnership,” “profit,” 

“sole proprietorship,” and “subchapter S corporation.”

limited partnership. A partnership with one or more general 

partners, who provide cash or property and management services, and one or more limited partners, who provide only cash 

or property. The liability of limited partners is limited to the 

amount of their investment in the partnership; because of this 

status, they have no right of control over the business. Also see 

“corporation,” “family limited partnership (FLP),” “limited liability company (LLC),” “partnership,” “sole proprietorship,” 

and “subchapter S corporation.”

log rule. A formula for estimating the relationship between 

the diameter and length of a tree or cut log and the board-foot 

volume of lumber that can be sawn from it. Several rules have 

been developed, based on varying assumptions about the thickness of the saw and sawing practice used, including Doyle, 

International 1/4 -Inch, Scribner, and Scribner-Doyle. Also see 

“board foot,” “MBF,” and “scaling.”

loss. (a) The amount by which the expenses from an investment 

or a trade or business exceed the revenue for a given tax year. 

Also see “Income” and “Profit.” (b) Damage or destruction 

of timber or another asset that is physical in nature and fixed 

in time by an identifiable event or events that have run their 

course. For timber, only unexpected and unusual levels of 

damage qualify as a loss for tax purposes; normal or expected 

losses from mortality and insect or disease damage are considered a cost of doing business. Also see “casualty loss,” “involuntary conversion,” “noncasualty loss,” and “theft loss.”

lump-sum timber sale. See “Outright timber sale.”

M

MACRS. See “Modified Accelerated Cost Recovery System 

(MACRS).”

mark. The process of designating trees that are to be sold. 

A common practice for marking individual trees is to spray 

indelible paint on the tree at eye level and at ground level. 

This allows the buyer to identify the trees to be sold and the 

seller to determine that only marked trees were cut. Also see 

“outright timber sale,” “pay-as-cut timber sale,” “IRC section 

631(a) transaction,” and “IRC section 631(b) disposal.”

material participation. When a taxpayer participates regularly, continuously, and substantially in the management and 

operation of a business. Material participation is the most active level of participation in an income-producing activity. To 

qualify, the taxpayer must meet at least one of six defined tests 

(see chapter 4, “The Passive Loss Rules”). Management expenses, property taxes, and interest on indebtedness for timber 

held at this level of business activity all are deductible against 

income from any source. Also see “active income,” “business,” “income,” “investment,” and “passive.”

MBF. Thousand board feet, the traditional unit of measurement for both sawtimber trees and sawn lumber. Also see 

“board foot,” “cord,” and “sawtimber.”

merchantable timber. Standing trees suitable for use as commercial wood products, for example, pulpwood, sawtimber, 

and so forth. Also see “merchantable timber subaccount,” 

“premerchantable timber,” “pulpwood,” “sawtimber,” and 

“timber.”

merchantable timber subaccount. A capital account that 

records the cost basis and volume basis of merchantable timber. Also see “capital account,” “cost basis,” “merchantable 

timber,” “plantation subaccount,” “timber account,” “volume 

basis,” and “young-growth subaccount.”

Modified Accelerated Cost Recovery System (MACRS).

The standard system for calculating depreciation deductions 

for most tangible personal property placed in service after 
Forest Landowners’ Guide to the Federal Income Tax 119

1986. The system for calculating depreciation deductions for 

most tangible personal property placed in service before 1987 

is the Accelerated Cost Recovery System (ACRS). Also see 

“deduct” and “depreciation.

multiple damages. Successful prosecution of a timber theft 

case sometimes results in an award expressed as a multiple of 

the value of the stolen timber, for example, double or triple 

damages. In an award of triple damages, one-third of the award 

represents compensatory damages for the stolen timber and the 

remaining two-thirds represents punitive damages (see chapter 7, 

“Theft Loss”). Also see “theft loss.”

N

natural regeneration. Reforestation accomplished by means 

of seeding-in from adjacent trees or sprouts from the stumps or 

roots of harvested trees. The process may include site preparation to provide a suitable seedbed and construction of fences to 

reduce damage from deer and other browsing animals. Also see 

“artificial regeneration,” “reforest,” and “site preparation.”

net operating loss (NOL). The amount by which total deductions for a taxpayer’s trade or business activities exceed his or 

her gross income for a particular tax year. Also see “income” 

and “loss.”

noncasualty loss. Damage, destruction, or loss of property resulting from an identifiable natural or outside event that is unusual and unexpected but not necessarily sudden, as from disease, 

insect infestation, drought, or a combination of factors. In most 

cases, a noncasualty loss is a business deduction. Qualifying 

forest owners whose timber is damaged or destroyed by a noncasualty event may be eligible to take a loss deduction on their 

Federal income tax (see chapter 7, “Noncasualty Loss”). Also see 

“business,” “casualty,” “involuntary conversion,” and “loss.”

O

operating expense. An ordinary and necessary expense associated with carrying on a trade or business. Operating expenses 

may be deducted annually, as they occur. Also see “business,” 

“carrying charge,” and “deduct.”

ordinary income. Reportable income other than capital gain, 

such as from wages, salaries, interest, dividends, rents, royalties, 

and the profit realized from the operation of a business. Also see 

“business,” “capital gain (or loss),” “income,” and “profit.”

original basis. A measure of the original capital investment 

in an income-producing asset. Original basis is the acquisition 

cost of purchased assets, generally the donor’s basis in the case 

of assets received as a gift, or the stepped-up basis in the case of 

inherited assets (see chapter 4, “Original and Adjusted Basis”). 

Also see “adjusted basis” and “basis,” and “stepped-up basis.”

outright timber sale. An outright sale of standing timber, for 

example, through a timber deed or sale contract, for a fixed 

amount agreed upon in advance. All the timber on a tract can 

be sold, or only certain species or diameter classes, or individually marked trees. Under most circumstances, income from an 

outright (lump-sum) timber sale can qualify for treatment as a 

capital gain, whether the seller is an investor or a participant in a 

trade or business. Also see “capital gain (or loss),” “date of disposal,” “income,” “pay-as-cut timber sale,” “IRC section 631(a) 

transaction,” “IRC section 631(b) disposal,” and “timber deed.”

P

partnership. An association of two or more persons or other 

entities to carry on, as co-owners, a business for profit. Also see 

“business,” “corporation,” “family limited partnership (FLP),” 

“limited liability company (LLC),” “Limited partnership,” 

“profit,” “sole proprietorship,” and “subchapter S corporation.”

passive. When a taxpayer does not participate in the management and operation of a business at the level necessary to qualify as material participation. Gain (or loss) from this level of 

activity is termed passive gain (or loss). Management expenses, 

property taxes, and interest on indebtedness for timber held at 

this level of business activity are deductible only to the extent 

of passive income. Also see “business,” “income,” “investment,” “material participation,” and “passive income.”

passive income. Income generated by a trade or business activity in which the taxpayer does not materially participate. Also 

see “active income,” “business,” “income,” “material participation,” and “passive.”

pay-as-cut timber sale. A sale of standing timber under a contract that requires payment at a specified price for each unit of 

timber that is cut and measured; technically, a “disposal with 

economic interest retained,” because the seller typically retains 

title to the timber and bears risk of loss until it is cut. Under 

most circumstances income from timber sold under a pay-as-cut 

contract can qualify for treatment as a capital gain, whether the 

seller is an investor or a participant in a trade or business. Also 

see “capital gain (or loss),” “date of disposal,” “income,” “outright timber sale,” “IRC section 631(a) transaction,” and “IRC 

section 631(b) disposal.”

placed-in-service date. The date at which property becomes 

ready and available for a particular use, regardless of whether 
120 Forest Landowners’ Guide to the Federal Income Tax

the property actually is put in use at that time, and regardless of 

whether the use is for a trade or business, production of income, 

a tax-exempt activity, or a personal activity.

plantation subaccount. See “deferred reforestation subaccount.”

portfolio income. Income generated by certain investment 

activities, such as buying and selling stocks or other financial 

securities. Also see “income” and “investment.”

precommercial thinning. See “thinning.”

premerchantable timber. Standing trees of species suitable for 

commercial wood products, but not yet large enough to be merchantable. Also see “merchantable timber.”

preproductive period. The time from when a stand of timber 

is established to when it starts to produce income. The uniform 

capitalization rules (UNICAP rules) require that costs incurred 

during the preproductive period be capitalized, but trees grown 

for the production of timber are not subject to the UNICAP 

rules. Also see “uniform capitalization rules.”

prescribed burn. To deliberately burn forestland fuels under 

specified environmental conditions, which allows the fire to be 

confined to a predetermined area and produces the fire intensity 

and rate of spread required to attain the planned resource management objectives. Prescribed burns may be used for several 

purposes, including to prepare a site for artificial or natural 

regeneration, to improve wildlife forage and habitat, to control 

competing vegetation, or as a tool in ecological restoration. 

Also see “artificial regeneration,” “intermediate treatment,” 

“natural regeneration,” and “site preparation.”

proceeds. The total amount received from the disposition of an 

asset, either as payment in cash, notes or other securities, services in kind, other assets, or any other valuable consideration.

profit. The amount by which the revenue from an investment 

or a trade or business exceeds the expenses for a given tax year. 

Profit also includes appreciation in the value of assets. Asset appreciation is particularly relevant to timber, which appreciates 

in value through physical growth and enhanced quality even 

though it may not be harvested for a period of years. Also see 

“for profit,” “income,” and “loss.”

pulpwood. Standing or harvested trees of an appropriate size 

and species to be used to produce pulp for paper products. Also 

see “merchantable timber” and “sawtimber.”

purchase. To acquire an asset through payment in cash, notes 

or other securities, services in kind, other assets, or any other 

valuable consideration; to buy.

Q

qualified timber property (QTP). A separately identifiable 

tract of land used for timber production. The $10,000 per year 

limit on the deduction of qualified timber establishment costs 

under IRC section 194 applies individually to each QTP. Each 

area of land that is reforested and the expenses deducted or amortized must be separately identified in the taxpayer’s records 

(see chapter 4, “Reforestation Tax Incentives,” and chapter 15, 

“Reforestation Account”).

R

real property. Land, including permanent improvements (for 

example, land leveling and the roadbeds of permanent roads) and 

depreciable improvements (for example, bridges, culverts, and 

the surfaces of permanent roads) to the land. Standing timber 

generally is real property; however in some States standing timber under contract for sale is considered personal property. Also 

see “depreciable improvement” and “tangible personal property.”

realized gain. The total consideration received for a transfer of 

property, minus the property’s adjusted basis and costs of disposal; net gain. Also see “recognized gain.”

recapture provision. Provisions in the IRC to collect part or all 

of any taxes saved if a taxpayer fails to fulfill the requirements 

of an incentive.

recognized gain. That portion of realized gain that is taxable. 

Also see “realized gain” and “taxable gain (or loss).”

recovery period. The number of years over which property in 

a given class is depreciated. The MACRS General Depreciation System divides most types of tangible depreciable property 

into classes with recovery periods of 3, 5, 7, 10, 15, or 20 years. 

Residential rental property has a recovery period of 27.5 years 

and nonresidential real property has a recovery period of 39 

years (31.5 years if the property was placed in service before 

May 13, 1993). Also see “depreciation” and “Modified Accelerated Cost Recovery System.”

reforest. To reestablish trees on a harvested area by means of 

planting trees, setting tree seeds, seeding-in from adjacent trees, 

or sprouts from the stumps or roots of harvested trees. Also see 

“afforest,” “artificial regeneration,” and “natural regeneration.”

regulations. The interpretation by the U.S. Department of the 

Treasury of the IRC enacted by the U.S. Congress. Regulations 

have the force and effect of law. They provide the official rules 

for applying the IRC to the circumstances of the majority of 

taxpayers. Also see “Internal Revenue Code (IRC)” and “revenue rulings.”
Forest Landowners’ Guide to the Federal Income Tax 121

Revenue Rulings (Rev. Rul.). The official interpretations by 

the IRS of the application of the IRC, related statutes, tax treaties, and regulations to specific circumstances. Revenue rulings 

are published for the information and guidance of taxpayers, 

IRS personnel, and other concerned parties. Also see “Internal 

Revenue Code (IRC),” “Internal Revenue Service (IRS),” and 

“regulations.”

rotation. The period of years required to establish and grow an 

even-aged timber stand or forest to maturity. Also see “evenaged,” “stand,” and “uneven-aged.”

S

S Corporation. See “subchapter S corporation.”

salvage sale. The sale of damaged timber before it deteriorates 

to the point of worthlessness. Also see “involuntary conversion.”

sawtimber. Standing trees of an appropriate size and species 

to be used to produce lumber. Logs cut from sawtimber trees 

are called sawlogs. Also see “merchantable timber” and “pulpwood.”

scaling. The process of estimating the volume of lumber that 

trees or cut logs will yield. In some regions of the United 

States, pulpwood and sawtimber are more commonly measured 

and sold by weight than by estimated yield. Also see “board 

foot,” “log rule,” “pulpwood,” and “sawtimber.”

self-employment tax. A tax levied on self-employed persons 

that is used to provide Social Security and Medicare coverage.

service forester. Also referred to as district or State foresters, 

service foresters are employed by the State agency charged 

with responsibility for protecting the State’s public and private 

forest land. These foresters are available for a variety of services, although the amount of time they can devote to any one 

landowner generally is limited. Service foresters also approve 

and certify financial assistance to landowners under Federal 

and State conservation cost-sharing programs. Their services 

generally are free. Also see “consulting forester,” “extension 

forester,” “forester,” and “industry forester.”

severance tax. A State excise tax on the cutting of timber. In 

most States in which a severance tax is levied, it is a tax that is 

in addition to any property tax levied or taxes in lieu of property taxes. Funds generated by the tax often are designated for 

specific forestry-related purposes, such as forest fire control, 

reforestation, or public forestry assistance. Also see “yield tax.”

single identifiable property (SIP). The measure used in calculating a loss from a casualty or theft, which is equal to the 

lesser of the adjusted basis of the SIP or the change in FMV of 

the SIP caused by the casualty or theft. With a forest property, 

the SIP generally is the timber block, or record-keeping unit that 

contains the timber affected by the casualty or theft.

site preparation. The preparation of land for planting trees, 

setting tree seeds, or seeding-in from adjacent trees. The objectives of site preparation include reduction of brush and other 

obstacles to allow planting equipment to operate, reduction of 

vegetation that would compete with young trees, scarification 

of the soil to provide a suitable seedbed, or any other action that 

may be required to facilitate afforestation or reforestation. Also 

see “afforest,” “artificial regeneration,” “natural regeneration,” 

“prescribed burn,” and “reforest.”

sole proprietorship. Noncorporate ownership of property or a 

business by one person only. Also see “corporation,” “family limited partnership (FLP),” “limited liability company (LLC),” “limited partnership,” “partnership,” and “subchapter S corporation.”

special use valuation. The valuation of farm or forest property 

in an estate, for Federal estate tax purposes, at its current value 

for farming or timber-growing rather than its FMV for its highest and best use, as permitted under IRC section 2032A. Also 

see “estate.”

species or value depletion unit. Under certain circumstances, 

it may be beneficial to maintain separate timber depletion accounts for individual species, value, or product classes of timber from one or more tracts. Also see “average depletion unit” 

and “depletion unit.”

stand. A contiguous group of trees that is managed or treated as 

a unit. Also see “Establishment cost,” “Even-aged,” “Harvest,” 

“Intermediate treatment,” “rotation,” “thinning,” “timber stand 

improvement (TSI),” and “uneven-aged.”

stepped-up basis. Assets acquired by inheritance take as their 

basis the FMV of the asset on the valuation date. This value 

generally is greater than the basis of the asset in the hands of 

the deceased, resulting in a step-up in basis in passing the asset 

from the deceased to the person inheriting it. Also see “basis” 

and “valuation date.”

stumpage. Standing trees or, more generally, the volume of 

recoverable wood in standing trees that have not been severed 

from their roots by cutting. Stumpage therefore includes the 

recoverable wood in trees that have been blown down or broken 

by wind or ice storm. Also see “outright timber sale,” “pay-ascut timber sale,” “salvage sale,” and “stumpage value.”
122 Forest Landowners’ Guide to the Federal Income Tax

stumpage value. The economic value of standing trees; in general, their FMV as of a specified date. Also see “stumpage.”

Subchapter S corporation. A corporation that has elected to 

be taxed under Subchapter S of the IRC (sections 1361 through 

1379) by filing IRS Form 2553 with the IRS. The primary 

advantage of Subchapter S corporation status is that corporate 

income, losses, deductions, and credits are passed through to 

shareholders as in a partnership, eliminating double taxation. 

The numerous requirements to qualify for Subchapter S corporation status include limits on the number and types of shareholders. Also see “corporation,” “family limited partnership 

(FLP),” “limited liability company (LLC),” “limited partnership,” “partnership,” and “sole proprietorship.”

T

tangible personal property. Property other than real property 

that can be seen or touched, such as machinery and equipment. 

Also see “real property.”

tax credit. An amount allowed as an offset against income tax 

for a particular tax year. A tax credit results in a direct dollarfor-dollar reduction in taxes due. The 10-percent investment tax 

credit for reforestation provided under IRC section 48 ended 

after October 22, 2004, and is no longer available. Also see 

“amortize” and “establishment cost.”

taxable gain (or loss). The net gain (or loss) from a transaction 

that must be recognized for tax purposes. Also see “income” 

and “recognized gain.”

taxable income. Adjusted gross income, minus personal exemptions and the applicable standard or itemized deduction. 

Also see “adjusted gross income (AGI),” “income,” and “taxable gain (or loss).”

tenancy by the entirety. A form of co-ownership between 

a husband and wife permitted in some States whereby real 

property is owned jointly by the spouses, with the interests 

of a deceased spouse passing directly to the surviving spouse 

without probate. Also see “co-ownership,” “joint tenancy,” and 

“tenancy in common.”

tenancy in common. A form of co-ownership whereby each 

co-owner can sell or divide his or her share, or otherwise transfer his or her interest, as he or she wishes, either during his or 

her lifetime or upon death. Also see “co-ownership,” “joint tenancy,” and “tenancy by the entirety.”

theft loss. When someone takes and removes property or money with the intent to deprive the owner of it. Forest owners who 

suffer a theft of timber may be eligible to take a loss deduction 

on their Federal income tax (see chapter 7, “Theft Loss”). Also 

see “casualty,” “involuntary conversion,” “loss,” and “multiple 

damages.”

thinning. An intermediate treatment to reduce the density of 

trees in a stand. A stand may be thinned to release timber trees 

from competing vegetation, improve forest health, or recover 

merchantable products from trees that may soon die, for example, from disease, insect attack, or overcrowding. A precommercial thinning is conducted before the trees in the stand are 

large enough to be merchantable; a commercial thinning is conducted after the trees have attained merchantable size, producing income that may qualify for treatment as a long-term capital 

gain. Also see “capital gain (or loss),” “income,” “intermediate 

treatment,” “merchantable timber,” and “stand.”

timber. Standing trees of species suitable for wood products. 

IRC section 631 specifically includes as timber evergreen (coniferous) trees more than 6 years old when cut and sold for ornamental purposes—that is, Christmas trees—but not evergreen 

trees sold live, or greenery cut from standing trees. Also see 

“merchantable timber.”

timber account. A capital account that records the cost basis 

and volume basis of an owner’s timber assets. Separate subaccounts must be kept for merchantable and premerchantable 

timber. Further divisions—by timber type, product, or tract, 

for example—are permitted and appropriate if they facilitate 

planning or management, but are not required. Also see “capital 

account,” “cost basis,” “merchantable timber,” “merchantable 

timber subaccount,” “plantation subaccount,” “premerchantable 

timber,” “timber,” “volume basis,” and “young-growth subaccount.”

timber cruise. The process by which the volume, type, and 

quality of timber within a designated area is determined. A 

cruise can be made by measuring each tree in the area—referred to as a timber inventory—or only those trees selected in 

a statistically based sampling system. Also see “timber” and 

“timber volume.”

timber deed. A legal instrument that conveys title to timber 

before it is cut by the transferee. A timber deed typically is used 

for outright (lump-sum) timber sales. Also see “outright timber 

sale” and “IRC section 631(b) disposal.”

timber owner. Anyone with the right, if he or she so chooses, 

to cut timber for sale on his or her own account or for use in 

their trade or business. This definition includes the holder of 

a sublease or cutting contract (see chapter 5, “IRC Section 
Forest Landowners’ Guide to the Federal Income Tax 123

631(a) Cutting of Standing Timber With an Election to Treat as 

a Sale”). Also see “IRC section 631(a) transaction” and “IRC 

section 631(b) disposal.”

timber stand improvement (TSI). A collective term for management practices used in an established timber stand to improve 

the composition or condition of the timber or to concentrate 

growth on selected trees. Examples include improvement cuts 

to remove trees of less valuable species, sanitation cuts to remove damaged or diseased trees, and cull tree removal. Also 

see “intermediate treatment” and “stand.”

timber theft. See “theft loss.”

timber trespass. See “theft loss.”

timber volume. An estimate of the usable wood volume of 

standing trees, measured in board feet, cubic feet, or other 

units. Also see “board foot,” “MBF,” “merchantable timber,” 

“timber,” and “timber cruise.”

transaction. An action or event that leads to an entry in a ledger or other book of accounts. Also see “account,” “journal,” 

and “ledger.”

trust. An arrangement made either during the life of the person 

who creates the trust (the settlor or donor) or under the terms 

of his or her will, by which a person or entity called the trustee 

holds legal title to designated property in trust and manages it 

for the benefit of one or more beneficiaries. A trust is a legal 

entity under State law, separate from any of the parties to the 

trust. Because of the legal and tax complexities associated with 

trusts, legal counsel should be consulted.

U

uneven-aged. A stand or forest in which the ages of the timber 

trees are distributed across a broad range. Also see “evenaged,” “stand,” and “timber.”

uniform capitalization rules (UNICAP rules). The rules that 

require that preproductive costs associated with a business or 

investment be capitalized rather than deducted if the preproductive period is longer than 2 years. These rules do not apply 

to timber (see chapter 10, “Uniform Capitalization Rules”). 

Also see “preproductive period.”

useful life. An estimate by the IRS of the number of years that 

a particular type of income-producing property or equipment 

will remain useful in a trade or business or an investment; also, 

the number of years over which the owner can take annual 

depreciation deductions to recover his or her basis in the property or equipment. Also see “depreciable improvement” and 

“depreciation.”

V

valuation date. The effective date of an appraisal of the value 

of assets. For property in an estate, the valuation date is either 

the date of the decedent’s death or the alternate valuation date. 

The alternate valuation date is the earlier of 6 months after the 

date of the decedent’s death or the date any estate asset is sold. 

The executor of an estate may elect to use the alternate valuation date instead of the date of the decedent’s death for valuation of estate assets, if it reduces the value of the estate and the 

Federal estate tax due. If the alternate valuation date is used, 

however, it must be used for all assets in the estate. Also see 

“appraisal” and “estate.”

veneer. Thin strips of wood peeled, sawn, or sliced from a log. 

Veneer is used in the production of a wide variety of products, 

including plywood, paneling, boxes, baskets, and furniture. 

Also see “merchantable timber,” “pulpwood,” and “sawtimber.”

volume basis. For timber and other capital assets that naturally 

increase in volume or size over time, the volume element of 

basis in the asset. Also see “basis,” “capital asset,” and “cost 

basis.”

Y

yield tax. A State tax due when income is realized from harvesting timber. A yield tax usually is in lieu of an annual property tax that otherwise would be levied on the timber year by 

year as it grew. Also see “severance tax.”

young-growth subaccount. A capital account that records the 

cost basis and acreage of trees of premerchantable size that 

were in existence at the time the timberland was acquired. Also 

see “capital account,” “cost basis,” “merchantable timber subaccount,” “timber account,” and “plantation subaccount.”
124 Forest Landowners’ Guide to the Federal Income Tax
Forest Landowners’ Guide to the Federal Income Tax 125

This appendix provides summaries of pertinent revenue rulings 

(Rev. Rul.) dealing with timber. Obsolete and inconsequential 

rulings are not listed. Citations are given to the complete texts: 

Cumulative Bulletin (C.B.) published by the U.S. Department 

of the Treasury. The rulings are categorized by general subject 

and listed alphabetically within each general subject by keyword. The complete text of rulings summarized here and the 

text of modified, obsolete, and related rulings are available on 

the National Timber Tax Web site http://www.timbertax.org/

research/revenuerulings/. This site also includes a findings list 

that provides the current status of each ruling. Individual rulings are additionally available on the Internal Revenue Service 

(IRS) Web site http://www.irs.gov/.

Basis and Depletion Allowance

Basis for Depletion of Long-Term Timber Contract. The fair 

market value (FMV) of the timber existing at the time of the 

execution of a long-term timber-purchase contract constitutes 

the basis for depletion of the timber and payments in excess of 

the FMV are consideration for the use of land deductible as a 

business expense. Rev. Rul. 75-59, 1975-1 C.B. 177, amplified 

by Rev. Rul. 78-267, 1978-2 C.B. 171; also see IRC §§ 162; 

612; Treas. Reg. §§ 1.162-1; 1.612-1.

Christmas Trees, Capital and Operating Expenditures. 

In connection with the cultivation, as a trade or business, of 

Christmas trees for purposes of sale when they are more than 

6 years old, the expenditures incurred for planting must be 

capitalized. Expenditures incurred for silvicultural practices 

such as weeding, cleaning, and noncommercial thinning are deductible as ordinary and necessary trade or business expenses. 

The cost of land improvements is capitalized in the land account. The cost of purchased equipment and other depreciable 

assets, such as culverts and fences, should be capitalized and 

recovered through the allowance for depreciation. Rev. Rul. 

66-18, 1966-1 C.B. 59, modified by Rev. Rul. 71-228, 1971-1 

C.B. 53, which concludes that costs incurred after May 24, 

1971, for shearing and basal pruning of trees grown for the 

Christmas tree market are deductible expenses.

Cutting Contract, Advanced Royalties. Advanced royalties 

paid or accrued by a lessee under a timber-cutting contract in 

a tax year for timber cut during that year are not deductible 

under the provisions of Treasury Regulation (Treas. Reg.) section 1.612-3(b)(3), but are to be added to the lessee’s depletable 

basis in the timber. Rev. Rul. 77-400, 1977-2 C.B. 206; also see

IRC §§ 612; 631; Treas. Reg. §§ 1.612-3; 1.631-2.

Depletion; Reforestation Expenditures. The expenditures for 

destroying undesirable hardwood trees and brush in naturally 

reforested stands of southern pine young-growth when related 

primarily to the seeding and establishment of the pine seedlings 

are capital expenditures recoverable through depletion. Rev. 

Rul. 76-290, 1976-2 C.B. 188; also see IRC § 611; Treas. Reg. 

§ 1.611-3.

Logging Roads, Depreciation. Depreciation of logging-truck 

roads is distinguished in situations where (1) the road is expected 

to be useful to the taxpayer for an indefinite period and (2) the 

road has a determinable useful life to the taxpayer. In the first 

situation, where the surfacing, bridges, and culverts of a loggingtruck road are expected to have a determinable useful life to the 

taxpayer, these assets are depreciable or amortizable. Because 

the roadbed of a well-maintained road has an indefinite useful 

life, its cost is not depreciable or amortizable. In the second situation, all components are depreciable or amortizable because all 

have a determinable useful life to the taxpayer. Rev. Rul. 88-99, 

1988-2 C.B. 33, clarifying Rev. Rul. 68-281, 1968-1 C.B.

Logging Roads, Permanent vs. Temporary, Investment 

Credit. A taxpayer’s logging-truck roads are “section 38 property” for investment credit purpose because they are an integral 

part of the operation of sawmills, the production of lumber and 

related products or other building materials, or the manufacture 

of paper. Rev. Rul. 68-281, 1968-1 C.B. 22, clarified by Rev. 

Rul. 88-99, 1988-2 C.B. 33, distinguished by Rev. Rul. 73-217, 

1973-1 C.B. 36; also see IRC §§ 38; 48; Treas. Reg. §§ 1.46-

3(e)(4),(5); 1.46-3(c)(1); 1.48-1(k); 1.48-1(b)(4); 1.48-1(d)

(2),(4).

Losses; Death of Tree Seedlings; Timber Producer. A timber 

producer sustains no deductible loss on the death, not due to 

casualty, of tree seedlings planted to reforest land from which 

it has harvested the mature timber. Amounts paid or incurred 

in replanting to replace the lost seedlings must be capitalized

in accordance with Treas. Reg. section 1.611-3(a). Rev. Rul. 

81-2, 1981-1 C.B. 78, distinguished and modified by Rev. Rul. 

90-61, 1990-2 C.B. 39, which concludes that greater than normally anticipated failure of planted tree seedlings because of an 

abnormal drought results in a deductible loss; also see IRC §§ 

165; 611; Treas. Reg. §§ 1.611-3; 1.165-1.

Appendix A. Summaries of Selected Revenue Rulings
126 Forest Landowners’ Guide to the Federal Income Tax

“Purchaser Credit” Road Construction Contract, USDA 

Forest Service. The basis for cost depletion of timber does 

not include the “purchaser credit” earned for specified road 

construction under a U.S. Department of Agriculture (USDA), 

Forest Service contract. Furthermore, amounts expended for 

construction of such roads are recovered through depreciation 

if the roads are used for harvesting the timber or added to the 

depletion basis if the roads are not used for harvesting the timber. Rev. Rul. 71-354, 1971-2 C.B. 246; also see IRC §§ 611; 

612; 631; Treas. Reg. §§ 1.611-5; 1.612-1; 1.631-1.

Reforestation. In general, direct costs of reforestation, including girdling, herbicide application, baiting of rodents, labor and 

tool expense, and equipment depreciation for machines used 

in planting and seeding, are capital expenditures recoverable 

through depletion allowances when the timber is cut or as adjusted basis if the timber is sold. Indirect costs, deducted in the 

year incurred or capitalized cumulatively under section 266 of 

the Internal Revenue Code (IRC), include interest paid on money borrowed or service charges on performance bonds in lieu 

thereof to satisfy a State law requiring a deposit to guarantee 

reforestation. Rev. Rul. 75-467, 1975-2 C.B. 93, superseding

Rev. Rul. 55-252. 1955-1 C.B.319; also see IRC §§ 263; 611; 

1011; Treas. Reg. §§ 1.263(a)-1; 1.611-3; 1.1011-1.

Reimbursements Under the Forestry Incentives Program 

(FIP). The excludable portion of cost-sharing payments received under the Forestry Incentives Program (FIP) is excludable from gross income, and the total costs of reforestation 

less the excludable portion are to be capitalized as a cost of 

timber. Under the election not to have IRC section 126 apply 

to the FIP payment, the entire payment is includible in gross 

income, and the total costs of reforestation (not reduced by any 

portion of the FIP payment) are to be capitalized as a cost of 

timber. Rev. Rul. 84-67, 1984-1 C.B. 28, modifying and superseding, Rev. Rul. 76-6, 1976-1 C.B. 176; also see IRC §§ 61; 

126; 194; 611; Treas. Reg. §§ 1.61-1; 16A.126-1; 16A.126-2; 

1.194-1; 1.611-3.

Timber Fertilization; Business Expenses. Costs incurred 

by a timber grower for post-establishment fertilization of an 

established timber stand are deductible as ordinary and necessary business expenses under IRC section 162. Such costs are 

similar to other deductible post-establishment costs such as the 

cost of fire, disease, insect and brush control in that they are 

performed to manage, maintain and protect the timber stand. 

A taxpayer changing its method of accounting to comply with 

this guidance must file an IRS Form 3115 in accordance with 

the automatic change method of accounting under Rev. Proc. 

2002-9, 2002-1 C.B. 327, modified and amplified by Rev. Proc. 

2002-19, 2002-1 C.B. 696. Under Rev. Rul. 2004-62, 2004-1 

C.B. 1072, any change in a taxpayer’s treatment of post-establishment fertilization costs to conform with Rev. Rul. 2004-62 

is an automatic change in method of accounting. Also see IRC 

sections 162; 446; Treas. Reg. §§ 1.162-1(a); 1.162-4; 1.263(a)-

1(a); 263A(c)(5)(A).

Capital Gains

Built-In Gains Tax on S Corporations, Disposal of Timber. 

An S corporation’s gain recognized in certain described transactions is not recognized as built-in gain for purposes of the tax 

imposed by section 1374 of the Internal Revenue Code (IRC). 

The situations described involve an S corporation holding timber, coal or domestic iron ore property with built-in gain on the 

date its election to convert from a C corporation to an S corporation is effective. Rev. Rul. 2001-50, 2001-2 C.B. 343; also 

see IRC §§ 631; 1374; Treas. Reg. § 1.1374-4.

Capital Asset Defined. Under a contract for a term of 60 years 

granting the right to grow timber and to cut timber growing and 

to be grown upon a timber tract, a paper company was obligated 

to make yearly payments not contingent on the quantities of timber cut. Hence, the transaction is not a “disposal” of timber under IRC section 631(b). Payments equal to the fair market value 

(FMV) of the timber existing on the tract at the execution of the 

contract are proceeds of a sale of timber and any gain included 

in this amount is capital gain, provided the conditions of IRC 

sections 1221 or 1231 are met. Any excess of such payments 

over the FMV of the timber existing at the execution of the contract is ordinary income. Rev. Rul. 62-81, 1962-1 C.B. 153, amplified by Rev. Rul. 78-267, 1978-2 C.B. 171; also see IRC §§ 

631; 1221; 1231; Treas. Reg. §§ 1.1221-1; 1.1231-1; 1.631-1.

Christmas Trees Sold on “Choose and Cut” Basis. Income 

realized from the sale of Christmas trees that are selected and 

cut on the taxpayer’s land by individual purchasers is ordinary 

income. The taxpayer may, however, elect to treat the cutting of 

trees as sales or exchanges of timber as prescribed by Treasury 

Regulation (Treas. Reg.) section 1.631-1. Rev. Rul. 77-229, 

1977-2 C.B. 210; also see IRC §§ 631; 1231; Treas. Reg. §§ 

1.1231-1; 1.631-1.

Cutting Contract, “Contract Right To Cut” Defined. To be 

entitled to the benefits of IRC section 631(a) as the holder of 

a “contract right to cut” timber, a taxpayer must have acquired 

under the contract a proprietary interest in the timber which he 

cuts. Rev. Rul. 58-295, 1958-1 C.B. 249; also see IRC § 631; 

Treas. Reg. § 1.631-1.
Forest Landowners’ Guide to the Federal Income Tax 127

Default of Performance Bond. An amount received by the fee 

owner of certain timberlands from the default of a cash performance bond posted by a grantee under a contract involving the 

cutting and disposal of timber is not an amount realized from 

the disposal of timber under IRC section 631(b) and is taxable 

as ordinary income. Rev. Rul. 61-56, 1961-1 C.B. 243; also see 

IRC § 631; Treas. Reg. § 1.631-1.

Determination of Quantity; Timber Cutting Treated as a 

Sale or Exchange. A taxpayer who acquired timber-cutting 

rights under a USDA Forest Service cutting contract is considered to have first definitely determined the quantity of timber 

cut, for the purposes of the election to treat cutting of timber 

as a sale or exchange under IRC section 631(a), when a truck 

scale is made using a bureau scaler at the time the logs arrived 

at the taxpayer’s sawmill even though a mill deck scale is made 

later by a USDA Forest Service scaler. Rev. Rul. 73-267, 1973-

1 C.B. 306, distinguished by Rev. Rul. 73-489, 1973-2 C.B. 

208; also see IRC § 631; Treas. Reg. § 1.631-1.

Determination of Quantity; Timber Cutting Treated as a 

Sale or Exchange. A calendar year accrual method taxpayer 

who owns and operates a sawmill, acquired timber-cutting 

rights under USDA Forest Service cutting contracts requiring 

that, for payment purposes, logs be scaled by a USDA Forest Service scaler and who elects to treat the cutting of timber 

as a sale or exchange is considered to have cut the timber for 

purposes of IRC section 631(a) when the logs are scaled on the 

mill deck by the USDA Forest Service scaler in the ordinary 

course of business. Rev. Rul. 73-489, 1973-2 C.B. 208, distinguishing Rev. Rul. 73-267, 1973-1 C.B. 306; also see IRC § 

631; Treas. Reg. § 1.631-1.

Disposal With Economic Interest Retained. In the case of the 

disposal of timber, held for the requisite period of time before 

disposal, by the owner under any form or type of contract by 

virtue of which the owner retains an economic interest in such 

timber, pursuant to IRC section 631(b), the gain or loss on such 

disposal is subject to the capital gains tax treatment provided 

by IRC section 1231 regardless of the nature of the taxpayer’s 

business or the purpose for which the timber is held. Rev. Rul. 

57-90, 1957-1 C.B. 199; also see IRC §§ 631; 1231.

Gain From Timberland Sale. Gain realized by an electing 

small business corporation from the sale of timberland held primarily for the production of timber products and not for sale to 

customers is gain from the sale of real property used in a trade 

or business under IRC section 1231(b), subject to Treas. Reg. 

section 1.1375-1(d). Rev. Rul. 73-222, 1973-1 C.B. 373; also 

see IRC §§ 1231; 1375; Treas. Reg. §§ 1.1231-1; 1.1375-1(d).

Holding Period. A taxpayer who acquired timber on December 

31, 1962, and still owned it at the beginning of his tax year, 

which began July 1, 1963, has owned such timber for a period 

of more than 6 months before the beginning of such tax year for 

purposes of IRC section 631(a). Rev. Rul. 66-6, 1966-1 C.B. 

160; also see IRC § 631; Treas. Reg. § 1.631-1.

Holding Period of Property. A capital asset that is acquired 

on the last day of any calendar month, regardless of whether 

the month has 31 days, must not be disposed of until on or after 

the first day of the seventh succeeding month of the calendar to 

have been “held for more than 6 months” within the meaning of 

IRC sections 1222(3) and (4), and section 1231. Rev. Rul. 66-7, 

1966-1 C.B. 188; also see IRC §§ 1222; 1231.

Income From the Sale of Tree Stumps. Income from the sale 

of tree stumps from land held by an investment company which 

is not in the timber or stump business, either as a buyer, seller 

or processor, is taxable as a capital gain where the land was 

acquired in a cutover state as a real estate investment and the 

stumps were sold in one lot. Rev. Rul. 57-9, 1957-1 C.B. 265; 

also see IRC § 1221.

Pulpwood From Tops and Limbs of Sawtimber Trees. Treating the cutting of timber as the disposal of standing trees for 

capital gain purposes applies only to the disposal of standing 

trees and not to the sale of tree tops and limbs lying on the 

ground. Income from the sale of the tree tops and limbs is ordinary gain or loss; however, the IRC section 631(a) benefits 

apply to the entire standing tree. The method of computing the 

FMV of such trees is specified. Rev. Rul. 56-434, 1956-2 C.B. 

334; also see IRC § 631.

Right To Cut and Remove for Landowner. A taxpayer who 

acquires by contract the right to cut, remove, and sell timber 

from the land of another for the account of the landowner, but 

not the right to cut the timber for sale on his own account or for 

use in his trade or business, is not the holder of “a contract right 

to cut” such timber within the meaning of IRC section 631(a). 

Also, the taxpayer is not entitled to the treatment provided by 

IRC section 631(b), relating to a disposal by the owner. Rev. 

Rul. 58-579, 1958-2 C.B. 361; also see IRC § 631; Treas. Reg. 

§ 1.631-1.

Timber Cutting Contract, Fair Market Value of Timber 

Cut. The terms of a contract under which the taxpayer acquired 

the unrestricted right to cut and use timber in its lumber manufacturing business are not relevant in determining the FMV of 

timber cut for the purposes of IRC section 631(a). Rev. Rul. 

74-271, 1974-1 C.B. 151; also see IRC § 631; Treas. Reg. § 

1.631-1.
128 Forest Landowners’ Guide to the Federal Income Tax

Timber Cutting Contract, Payment for Failure To Cut. 

Amounts received under a timber-cutting contract for timber 

cut, the quantity of which is based upon a cruise rather than 

scaling, qualifies for treatment under IRC section 631(b). A 

penalty payment received for failure to cut any portion of the 

“cruised” or marked trees during the term of the contract is 

ordinary income. Rev. Rul. 78-104, 1978-1 C.B. 194; also see

IRC § 631; Treas. Reg. § 1.631-2.

Timber Cutting Contract; Road Credit. The amount subject 

to treatment under IRC section 631(b) by a corporate timberland owner that disposes of timber under a cutting contract that 

specifies the unit price for an estimated number of units and the 

amount of a “road credit” allowed the purchaser for building 

access roads is the actual amount realized, which is the total 

contract price reduced by the road credit. Rev. Rul. 75-306, 

1975-2 C.B. 243; also see IRC § 631; Treas. Reg. § 1.631-2.

Timber Cutting Rights; Option Agreement; Holding Periods. An option on a right to cut timber that is transferred as 

part of an exchange of property is not an enforceable contract 

right to cut for IRC section 631(a) purposes, in cases where the 

claimed right to cut is exercisable only after a future date or 

occurrence or is contingent upon an election or a transfer of additional consideration by a taxpayer. The holding period in such 

cases commences only when the right to cut becomes exercisable. Rev. Rul. 74-529, 1974-2 C.B. 185; also see IRC § 631; 

Treas. Reg. § 1.631-1.

Timberland Tracts; Holding Period. The holding period of 

each of several tracts in a timber acreage purchased under a 

single indivisible contract with annual payments and release of 

deeds from escrow based on tracts selected for cutting begins 

on the day after the execution of the contract. Rev. Rul. 72-252, 

1972-1 C.B. 193; also see IRC § 631; Treas. Reg. § 1.631-1.

Treatment of Expenses for Timber Disposal. Expenditures

directly attributable to a disposal of timber under IRC section 

631(b) are reductions of the “amount received” for purposes of 

computing gain or loss from such disposal. Whether expenditures are directly attributable to a disposal is determined largely 

on the strength or persuasiveness of the facts of each particular 

case and how closely related to the disposal of the timber are 

the activities in connection with which the expenditures are 

incurred. Rev. Rul. 71-334, 1971-2 C.B. 248; also see IRC § 

631; Treas. Reg. § 1.631-2.

Unstated Interest; Long-Term Timber Contracts. The application of the unstated interest provisions of IRC section 483 

to long-term timber contracts is described in situations in which 

the taxpayer is (1) a landowner who receives the entire consideration under the contract in a lump sum on the date the contract 

is signed, (2) a landowner who is to receive payments over a 

period of 60 years under a contract for the sale of timber and 

lease of the land on which the timber is growing, and (3) a paper 

company that makes payments under a contract similar to that in 

situation 2. Rev. Rul. 78-267, 1978-2 C.B. 171, amplifying Rev. 

Rul. 62-81, 1962-1 C.B. 153; Rev. Rul. 62-82, 1962-1 C.B. 155; 

and Rev. Rul. 75-59, 1975-1 C.B. 177; also see IRC §§ 483; 

1221; 1231; Treas. Reg. §§ 1.483-1; 1.1221-1; 1.1231-1.

Unstated Interest; Long-Term Timber Contracts. Under the 

terms of the long-term timber contract the landowner receives 

a lump sum payment on the date the contract is signed. This 

payment is the only payment received by the landowner. No 

payments are due more than 6 months after the date of the execution of the contract. IRC section 483 does not apply under 

the circumstances because no deferred payments are provided 

for under the terms of the contract. Rev. Rul. 62-82, amplified 

by Rev. Rul. 78-267; also see IRC §§ 631; 1221; 1231; Treas. 

Reg. §§ 1.631-1; 1.1221-1; 1.1231-1.

When Timber “Cut” for Determining Capital Gain or Loss 

Treatment. For purposes of determining capital gain or loss, 

timber is considered “cut” at the time when in the ordinary course 

of business the quantity of timber felled is first definitely determined, rather than at the time of the felling. Rev. Rul. 58-135, 

1958-1 C.B. 519; also see IRC § 631; Treas. Reg. § 1.631-1.

Cost-Sharing Payments

Certain Cost-Sharing Payments. The USDA Conservation 

Reserve Program (CRP) was determined to be substantially 

similar to the type of programs described in section 126(a)(1) 

through (8) of the Internal Revenue Code (IRC). Thus, costsharing payments made under the program may be excluded 

from gross income to the extent permitted under IRC section 

126. Rental payments and incentive payments made to CRP 

participants do not qualify as cost-sharing payments, however, 

and therefore are not excludable from gross income. Rev. Rul. 

2003-59, 2003-1 C.B. 1014; also see IRC §§ 61; 126; Treas. 

Reg. §§ 16A.126-1; 16A.126-2.

Certain Cost-Sharing Payments. The Conservation Security 

Program (CSP) was determined to be substantially similar to 

the type of program described in IRC section 126(a)(1) through 

(8). Thus, cost-sharing payments made under the program may 

be excluded from gross income to the extent permitted under 

IRC section 126. Rev. Rul. 2006-46, 2006-2 C.B. 511; also see

IRC §§ 61; 126; Treas. Reg. §§ 16A.126-1; 16A.126-2.
Forest Landowners’ Guide to the Federal Income Tax 129

Certain Cost-Sharing Payments. The Wetlands Reserve Program (WRP), Wildlife Habitat Incentives Program (WHIP), 

and Environmental Quality Incentives Program (EQIP) were 

determined to be substantially similar to the type of program 

described in IRC section 126(a)(1) through (8). Thus, costsharing payments made under the programs may be excluded 

from gross income to the extent permitted under IRC section 

126. Rev. Rul. 97-55, 1997-2 C.B. 20; also see IRC §§ 61; 126; 

Treas. Reg. §§ 16A.126-1; 16A.126-2.

Certain Cost-Sharing Payments; Forest Health Protection 

Program (FHPP). The Forest Health Protection Program 

(FHPP) was determined to be substantially similar to the type 

of programs described in IRC section 126(a)(1) through (8) 

within the meaning of IRC section 126(a)(9). Consequently, all 

or a portion of cost-sharing payments received under the FHPP 

is eligible for exclusion from gross incometo the extent permitted under section 126. Rev. Rul. 2009-23, I.R.B. 2009-32; also 

see IRC §§ 61; 126; Treas. Reg. §§ 16A.126-1; 16A.126-2.

Certain Cost-Sharing Payments Under the Stewardship Incentives Program (SIP). The Stewardship Incentives Program 

(SIP) was determined to be substantially similar to the enumerated programs in IRC section 126, so that IRC section 126 

improvements made in connection with small watersheds and 

under the SIP are within the scope of IRC section 126 (a)(9). 

Thus, SIP cost-sharing payments in connection with improvements in small watersheds may be excluded from gross income 

to the extent permitted under IRC section 126. Rev. Rul. 94-27, 

1994-1 C.B. 26; also see IRC §§ 61; 126; Treas. Reg. §§ 1.61-

1; 16A.126-1; 16A.126-2.

Reimbursements Under the Forestry Incentives Program 

(FIP). The excludable portion of cost-sharing payments received under the Forestry Incentives Program (FIP) is excludable from gross income, and the total costs of reforestation, 

less the excludable portion, are to be capitalized as a cost of 

timber. Under the election not to have IRC section 126 apply 

to the FIP payment, the entire payment is includible in gross 

income, and the total costs of reforestation (not reduced by any 

portion of the FIP payment) are to be capitalized as a cost of 

timber. Rev. Rul. 84-67, 1984-1 C.B. 28, modifying and superseding, Rev. Rul. 76-6, 1976-1 C.B. 176; also see IRC §§ 61; 

126; 194; 611; Treas. Reg. §§ 1.61-1; 16A.126-1; 16A.126-2; 

1.194-1; 1.611-3.

Like-Kind Exchanges

Charitable Contribution; Bargain Sale. A corporation’s

exchange of timberland, with the corporation reserving the 

timber-cutting rights, for State-owned timberland of lesser fair 

market value is not a bargain sale within the meaning of IRC 

section 170, and the corporation is not entitled to a charitable 

contribution deduction; however, the exchange qualifies for 

nonrecognition of gain or loss under IRC section 1031(a). Rev. 

Rul. 76-253, 1976-2 C.B. 51; also see IRC §§ 170; 1031; Treas. 

Reg. §§ 1.170A-1; 1.1030(a)-1.

Like Kind Exchange; Bargain Sale to a State. An exchange 

of timberland owned by a producer of forest-related products 

for bare land of lesser value owned by a State, which is a bargain sale as defined in Treasury Regulation (Treas. Reg.) section 1.170A-4(c)(2)(iii), constitutes an exchange of like kind 

property under Internal Revenue Code (IRC) section 1031(a). 

The basis of the property received from the State is determined 

under IRC section 1031(d) as adjusted by applying IRC section 

1011(b). Rev. Rul. 78-163, 1978-1 C.B. 257; also see IRC §§ 

170; 1011; 1031; Treas. Reg. §§ 1.170A-4; 1.1011-2; 1.1031(a)-

1; 1.1031(d)-1.

Like-Kind Exchange of Timberland. The taxpayer conveyed 

to the United States timberland containing some virgin timber 

and also substantial second-growth timber in exchange for 

timberland supporting substantial virgin timber. The exchange 

qualified for nonrecognition of gain or loss under IRC section 

1031(a) because both the original and replacement lands were 

held for investment purposes. Rev Rul. 72-515, 1972-2 C.B. 

466; also see IRC § 1031(a); Treas. Reg. § 1.1031(a)-1(b).

Involuntary Conversions

Loss From Death of Tree Seedlings; Drought. Greater than 

normally anticipated failure of planted tree seedlings because of 

an abnormal drought results in a deductible loss under IRC section 165(a). The deductible loss, allowable for the year in which 

the seedlings died, is in an amount equal to previously capitalized reforestation costs that had to be duplicated on replanting 

and the loss is treated as a loss from an involuntary conversion 

of property under IRC section 1231(a)(4)(B). Rev. Rul. 90-61, 

1990-2 C.B. 39; distinguishing Rev. Rul. 81-2, 1981-1 C.B. 78, 

amplifying Rev. Rul. 87-59, 1987-2 C.B. 59; also see IRC §§ 

48; 165; 194; 611; 1231; Treas. Reg. §§ 1.48-1; 1.611-3; 1.194-

1; 1.1231-1.

Loss From Death of Tree Seedlings; Insect Attack. Loss of 

timber over a 9-month period following an unexpected and 

unusual insect attack that killed the timber trees gives rise to an 

allowable noncasualty business loss deduction that must be netted with other noncasualty IRC section 1231 gains and losses. 

Rev. Rul. 87-59, 1987-2 C.B. 59; distinguishing Rev. Rul. 66-9, 
130 Forest Landowners’ Guide to the Federal Income Tax

1966-1 C.B. 39, and Rev. Rul. 79-174, 1979-1 C.B. 99, amplified by Rev. Rul. 90-61, 1990-2 C.B. 39; also see IRC §§ 48; 

165; 194; 611; 612; 1231; Treas. Reg. §§ 1.48-1, 1.165-1, 

1.165-7, 1.194-1, 1.611-3, 1.612-1, 1.1231-1.

Losses; Casualty; Trees Destroyed By Onslaught of Beetles. 

The death of ornamental trees 5 to 10 days following a massive southern pine beetle attack in an area not known for such 

massive attacks results in an allowable casualty loss deduction 

to the extent provided by Internal Revenue Code (IRC) section 

165(c). Rev. Rul. 79-174 modifies Rev. Rul. 57-599, which had 

concluded that a loss arising from death of a tree as a result of 

disease or attack by insects does not constitute an allowable deduction to the extent provided by Internal Revenue Code (IRC) 

section 165(c). Rev. Rul. 79-174, 1979-1 C.B. 99; modifying

Rev. Rul. 57-99, 1957-2 C.B. 142; also see IRC § 165; Treas. 

Reg. § 1.165-7.

Losses; Death of Tree Seedlings; Timber Producer. A timber 

producer sustained no deductible loss on the death, not due to 

casualty, of tree seedlings planted to reforest land from which 

it has harvested the mature timber. Amounts paid or incurred 

in replanting to replace the lost seedlings must be capitalized

in accordance with Treas. Reg. section 1.611-3(a). Rev. Rul. 

81-2, 1981-1 C.B. 78, distinguished and modified by Rev. Rul. 

90-61, 1990-2 C.B. 39, which concludes that greater than normally anticipated failure of planted tree seedlings because of an 

abnormal drought results in a deductible loss; also see IRC §§ 

165; 611; Treas. Reg. §§ 1.611-3; 1.165-1.

Nonrecognition of Gain; Timber Damaged by Storm; Voluntary Sale. The nonrecognition of gain provisions of IRC 

section 1033(a) are applicable to the proceeds received from the 

voluntary sale of timber downed by high winds, earthquake, or 

a volcanic eruption when the proceeds are used to purchase other standing timber. Rev. Rul. 80-175 revokes Rev. Rul. 72-372, 

which had denied nonrecognition treatment. Rev. Rul. 80-175, 

1980-2 C.B. 230; revoking Rev. Rul. 72-372, 1972-2 C.B. 471; 

also see IRC § 1033; Treas. Reg. § 1.1033(a)-2.

Timber Casualty Losses. In Westvaco versus United States

(639 F.2d 700, 225 Ct. Cl. 436 (Ct. Cl. 1980)), the Court of 

Claims decided that the single identifiable property (SIP) 

damaged or destroyed by storms and fires included all the taxpayer’s standing timber in the district (block) directly affected 

by each casualty and not only the units of timber contained 

in the trees suffering mortal injury. The court enunciated the 

standard that the appropriate SIP is any unit of property that has 

an identifiable adjusted basis and that is reasonable and logical 

and identifiable in relation to the area affected by the casualty. 

The court also held that the allowable loss for casualty is not 

limited to merchantable units of timber totally destroyed. In 

Weyerhaeuser versus United States (92 F.3d 1148 (1996), rev’g 

in part and aff’g in part, 32 Fed. Cl. 80 (1994), cert, denied, 

519 U.S. 1091 (1997)), the United States Court of Appeals for 

the Federal Circuit held that the SIP damaged or destroyed by 

several forest fires and a volcanic eruption affecting the taxpayer’s timber property was the block, that subdivision of a 

taxpayer’s forest holdings selected by the taxpayer as a means 

of tracking the adjusted basis in the timber pursuant to Treasury 

Regulation (Treas. Reg.) section 1.611-(3)(d)(1). In light of the 

Westvaco and Weyerhaeuser decisions, the Internal Revenue 

Service (IRS) issued Revenue Rule (Rev. Rul.) 99-56, revoking the earlier Rev. Rul. 66-9 and 73-51, which had defined the 

“property involved” and the SIP destroyed in a casualty loss to 

timber as the quantity of timber rendered unfit for use by reason 

of the casualty, and defining the SIP for timber held to produce 

income as the block directly affected by the casualty. Rev. Rul. 

99-56, 1999-2 C.B. 676, revoking Rev. Rul. 66-9, 1966-1 C.B. 

39, and Rev. Rul. 73-51, 1973-1 C.B. 75; also see IRC § 165; 

Treas. Reg. § 1.165-7.
Forest Landowners’ Guide to the Federal Income Tax 131

Appendix B. IRS Form T (Timber): Forest Activities Schedule

4 Amount paid: a In cash

b In interest-bearing notes

c In non-interest-bearing notes

5a Amount of other consideration

b Explain the nature of other consideration and how you determined the amount shown on line 5a.

6 Legal expenses

7 Cruising, surveying, and other acquisition expenses

8 Total cost or other basis of property. Add lines 4a through 7

9 Allocation of total cost or other basis on books: Number of units Total cost or other basis Cost or other 

basis per unit Unit

a Forested land Acre

b Other unimproved land Acre

c Improved land (describe) 

Acre

Merchantable timber. Estimate the quantity

of merchantable timber present on the

acquisition date (see Regulations section

1.611-3(e)). Details of the timber estimate,

made for purposes of the acquisition, should

be available if your return is examined.

d

Premerchantable timber. Make an allocation

here only if it is a factor in the total cost or

value of the land.

e

f Improvements (list separately)

Mineral rights

h Total cost or other basis (same amount as line 8). Add lines 9a through 9g 





3a Name and address of seller or person from whom property was acquired b Date acquired

Acquisitions

1 Name of block and title of account

2 Location of property (by legal subdivisions or map surveys)

Part I

Form T (Timber) (Rev. 12-2005)

OMB No. 1545-0007 Form Forest Activities Schedule

(Rev. December 2005)  Attach to your tax return.

Attachment

Sequence No. 117 Department of the Treasury

Internal Revenue Service For tax year ending

Name(s) as shown on return Identifying number

T (Timber)

Cat. No. 16717G

 See separate instructions.

For Paperwork Reduction Act Notice, see separate instructions.

g

, 20 .
132 Forest Landowners’ Guide to the Federal Income Tax

Form T (Timber) (Rev. 12-2005) Page 2

Unit rate returnable through depletion, or basis of sales or losses. Divide line 7,

column (b), by line 7, column (a)

9 Quantity of timber cut during tax year

10 Depletion for the current tax year. Multiply line 8 by line 9

11 Quantity of standing timber sold or otherwise disposed of during tax year

12 Allowable as basis of sale. Multiply line 8 by line 11

13 Quantity of standing timber lost by fire or other cause during tax year

14 Allowable basis of loss plus any excess amount where decrease in FMV (before

and after the casualty) exceeds the standard depletion amount, but not the

block basis (see instructions)

15 Total reductions during tax year:

a In column (a), add lines 9, 11, and 13

b In column (b), add lines 10, 12, and 14

16 Net quantity and value at end of tax year. In column (a), subtract line 15a from

line 7. In column (b), subtract line 15b from line 7

17 Quantity of cut timber that was sold as logs or other rough products

Timber Depletion (see instructions)

Quantity

1 Name of block and title of account 

Cost or

other basis

(b) (a)

2 Estimated quantity of timber and cost or other basis returnable through depletion

at end of the preceding tax year

3 Increase or decrease of quantity of timber required by way of correction

4a Addition for growth (number of years covered  )

b Transfers from premerchantable timber account

c Transfers from deferred reforestation account

5 Timber acquired during tax year

6 Addition to capital during tax year

7 Total at end of tax year, before depletion. Add lines 2 through 6

8

Form T (Timber) (Rev. 12-2005)

Part II

If you express timber quantity in thousand board feet (MBF),

log scale, name the log rule used. If another unit of measure is

used, provide details 

18 Section 631(a):

a

b

Are you electing, or have you made an election in a prior tax year that is in effect, to report gains or

losses from the cutting of timber under section 631(a)? (see instructions)

Are you revoking your section 631(a) election (see instructions)?

Effective date 

Yes No

Yes No
Forest Landowners’ Guide to the Federal Income Tax 133

Form T (Timber) (Rev. 12-2005) Page 3

3a Purchaser’s name and address b Date of sale

4 Amount received: a In cash

b In interest-bearing notes

c In non-interest-bearing notes

5a

b

6 Total amount received for property. Add lines 4a, 4b, 4c, and 5a

Cost or other

basis per unit 7 Cost or other basis of property: Unit Number of units Total cost or other basis

a Forested land Acre

b Nonforested land Acre

c Improved land (describe)  Acre

Merchantable timber. Estimate in detail the

quantity of merchantable timber on the date

of sale or exchange. Include the quantity of

timber in each species of timber by

diameter at breast height (DBH) classes.

State the log rule used if the unit of measure

is thousand board feet (MBF), log scale. If

another unit of measure is used, provide

details. 

d

e Premerchantable timber

f Improvements (list separately)

g Mineral rights

h Total cost or other basis. Add lines 7a through 7g

i Direct sale expenses (cruising, marking, selling)

8 Profit or loss. Subtract the sum of lines 7h and 7i from line 6





1 Name of block and title of account

2 Location of property (by legal subdivisions or map surveys)

Form T (Timber) (Rev. 12-2005)

Amount of other consideration

Explain the nature of other consideration and how you determined the amount shown on line 5a:

Part III Profit or Loss From Land and Timber Sales (see instructions)
134 Forest Landowners’ Guide to the Federal Income Tax

Form T (Timber) (Rev. 12-2005) Page 4

Land Ownership

Show all changes in land accounts. Attach as many additional sheets as needed, following the format of lines 1 through 6.

Total cost

or other basis. Give

amount of March 1,

1913 appreciation, if

included

1 Name of block and title of account  Average rate

per acre Acres

2 Balance at beginning of year

3 Acquisitions during year

4 Sales during year

5 Other changes

Balance at end of year. Add lines 2 and 3, subtract line 4 and

add or subtract line 5

6

Form T (Timber) (Rev. 12-2005)

Reforestation and Timber Stand Activities (see instructions)

Kind of activity (burning, chopping,

spraying, planting, seeding, thinning,

pruning, fertilizing, etc.)

Number of

acres treated

Total

expenditures

Account, block, tract, area, or stand ID for each

Qualified Timber Property (QTP)

Total

Part V

Part IV

Total reforestation expenses

Amount to be amortized under IRC 194(a), including remaining reforestation

expenditures not expensed under section 194(b)

Additional Information.

1

2

3

b

Amount to be expensed under section 194(b). 

(See instructions for limitations)

4a
Forest Landowners’ Guide to the Federal Income Tax 135

Appendix C. Instructions for IRS Form T (Timber)

Userid: ________ Leading adjust: 100% ❏ Draft ❏ Ok to Print

PAGER/SGML Fileid: IT.SGM (18-Jan-2006) (Init. & date)

Filename: D:\USERS\LXPDB\documents\epicfiles\05iT(Timber)_05.sgm

Page 1 of 4 Instructions for Form T (Timber) 15:15 - 18-JAN-2006

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Department of the Treasury Instructions for Form T Internal Revenue Service

(Timber)

(Rev. December 2005)

Forest Activities Schedule

Section references are to the Internal Revenue Code unless otherwise noted.

What’s New purposes of making a subsequent sales every 3 or 4 years). However,

election. you must maintain adequate records

of these transactions and other • If you are required to file Form T If you are required to file Form T, timber-related activities during the (see Who Must File below), you can you may revoke this election by year, as discussed in Recordkeeping, elect to deduct a limited amount of checking the “Yes” box in Part II, line below. These transactions may be qualifying reforestation costs (up to 18b. If you are not required to file

Form T, attach a statement to your treated as an investment for tax $10,000 per qualified timber property purposes if your property is not held per year) by entering an amount on return.

for use in a trade or business. Part IV, line 4a. For more information, • Outright sales of timber by

see the instructions on page 3 and landowners will qualify for capital If you are required to file Form section 194. gains treatment after 2004. For more T for the current tax year (as information, see the instructions for Even if you are not required to file CAUTION discussed above under Who

!

Part III. Form T, you can elect to deduct on Must File), complete all the parts of

your tax return up to $10,000 of the form that apply. However, if you

qualifying reforestation costs per year General Instructions are not required to file Form T but

for each qualifying timber property. have other forest-related activities

Attach a statement to your return for Purpose of Form (reportable in Part I (Acquisitions),

the year in which reforestation costs Part IV (Reforestation and Timber Use Form T (Timber), Forest were paid or incurred and provide the Stand Activities), or Part V (Land Activities Schedule, to provide following information. Ownership), complete and attach the information on timber accounts when

1. The Unique Stand Identifier; appropriate tax form (for example, a sale or deemed sale under sections Form 4562 to claim depreciation) or 2. The total number of acres 631(a), 631(b), or other exchange statement to your income tax return reforested during the tax year; has occurred during the tax year. to report these activities. Also, 3. The nature of the reforestation For additional information maintain adequate records as treatments; and regarding federal income tax rules for discussed in Recordkeeping, below. 4. The total amounts of the reporting forest-related activities, see qualified reforestation expenses the following publications: Recordkeeping eligible to be amortized under section • Pub. 225, Farmer’s Tax Guide, 194(a) or deducted under section • Pub. 535, Business Expenses, and Maps. Do not attach maps of your

194(b). • Pub. 544, Sales and Other timber properties to Form T to

• Certain timber producers who hold Dispositions of Assets. substantiate any claimed deduction

not more than 500 acres of qualified for depletion of timber. Instead, you

timber property located in the Gulf Who Must File are required to retain records

Opportunity Zone for Hurricane sufficient to substantiate your right to Complete and attach Form T to your Katrina, Rita, or Wilma are allowed an claim the deduction, including a map income tax return only if you: increased reforestation expense (where necessary) to show clearly the • Claim a deduction for depletion of deduction. For more information, see location(s) of timber and land timber, Pub. 4492, Information for Taxpayers acquired, timber cut, and timber and • Elect under section 631(a) to treat Affected by Hurricanes Katrina, Rita, land sold for as long as their contents the cutting of timber as a sale or and Wilma. may become material in the exchange, or administration of any Internal • If you previously elected for any • Make an outright sale of timber Revenue law. tax year ending before October 23, under section 631(b).

2004, to treat the cutting of timber as Other business records. You must Complete Form T in accordance a sale or exchange under section also keep business records to with sections 194, 611, 631, and 631(a), you may revoke this election support other items reported on your 1231, and the related regulations. without the consent of the IRS for any tax return such as expenses incurred

tax year ending after October 22, Exceptions. You are not required to during the tax year for road

2004. The prior election (and file Form T if you only have an construction and for building drainage

revocation) is disregarded for occasional sale of timber (one or two structures.

Cat. No. 39879B
136 Forest Landowners’ Guide to the Federal Income Tax

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Note. Maintain separate cost What Is Included in Each and after the casualty event, not to

accounts for road construction and exceed the basis in the affected Account drainage structures, such as ditches block. Keep FMV appraisals in your You must include your timber in one and canals. For example, for roads records to support the claimed loss or more accounts. Generally, each constructed for logging timber or to (see Recordkeeping, earlier). account must include all your timber conduct management activities on fee that is located in one “block.” A block Line 18a land or land held under long-term may be: cutting contracts, maintain records If you are making the 631(a) election,

showing the number of miles 1. An operational unit that or have made the election in a prior

constructed and how the total includes all timber that would logically tax year, check the “Yes” box on line

expenditures were either (a) go to a single point of manufacture, 18a.

capitalized, (b) amortized, or (c) 2. A logging unit that includes all Note. The 631(a) election cannot be

claimed as an ordinary expense. timber that would logically be made on an amended return.

Keep separate records for each removed by a single logging You must maintain the following development, or unique stand identifier, depletion records.

3. An area established by the account, block, tract, or geographic Adjusted basis for depletion. geographical or political boundaries area tributary to a mill or mill Maintain records that show the of logical management areas. Timber complex. Also, keep records that adjusted basis for depletion, fair acquired under a cutting contract may verify the basis in property for as long market value (FMV), and gain or loss not be included in part of a block, but as they are needed to figure the basis for each sale or exchange of standing should be kept in a separate account. of the original or replacement timber for which you have a section

property. 631(a) election. The records must For exceptional cases, the timber show the adjusted basis for depletion in a given block may be divided into and the FMV of the timber as of the two or more accounts. See first day of the tax year in which Specific Instructions Regulations section 1.611-3(d) for

more information. timber was cut. The records must

show these amounts by species and Part I. Acquisitions unit rates if these transactions are Part II. Timber Depletion Complete this part if you acquired reported on a species basis. The gain Complete this part for each timber timber, timber-cutting contracts, or or loss on standing timber is reported account that has changed in quantity forest land during the tax year, on Form 4797, Sales of Business or dollar amount. A timber account whether the acquisition was by Property. may change in quantity or dollar purchase, exchange, gift, or Date of acquisition. The records amount as a result of acquisitions, inheritance. must provide the date of acquisition dispositions, the cutting of timber, of timber that was cut in the tax year, How to Report Acquisitions capitalized expenditures, casualty or if acquired after March 1, 1913; the theft losses, corrections, additions for Report acquisitions during the tax quantity of timber remaining (adjusted growth, and transfers from other year (whether taxable or not) of for growth, correction of estimates, accounts. Use this part to figure timber, timber-cutting contracts, or changes in use, and any change in depletion for timber cut or the basis forest land. Report separately each the log rule or other measure used); for timber sold or lost during the tax acquisition of $10,000 or more. and the adjusted basis at the year. A depletion schedule is required You may combine acquisitions of beginning of the tax year. The to be maintained for all types of records must state the acreage cut, less than $10,000 for each account timber ownership. and omit lines 2 and 3. For an the amount of timber cut from the

acquisition by gift or inheritance, skip Lines 1 through 6 applicable block during the tax year,

lines 4 through 7. and the log rule or other method used Provide data for each timber account to determine the quantity of timber For an acquisition or lease of separately. Account for any changes cut. If depletion accounts are kept by timber-cutting rights on a pay-as-cut that have occurred during the tax separate tracts or purchases, give the basis, except for those under which year. Attach as many additional information separately for each tract all cutting is completed within the tax pages as needed. If you deplete on a or timber purchase. year, do not complete lines 4 through block basis, combine new purchases

8. Instead, list the provisions of the with the opening balances and use If an average depletion rate based

purchase or lease agreement, the average depletion rate shown on on the average value or cost of a

timber block was used in earlier including the number of years from line 8, column (b), for all timber cut or

the effective date to the expiration sold, regardless of how long held. years, the adjusted basis referred to

date, annual minimum cut or in section 631(a) is the average basis

payment, and the payment rates for Line 14, column (b) shown on line 8, column (b), after

different kinds of timber and forest The casualty loss limitation is adjustment.

products. Follow the format of lines 1 determined by the decrease in fair Characteristics of the timber. The

through 9 on additional sheets if market value (FMV) of the Single records must describe in detail the

necessary. Identifiable Property (block) before characteristics of the timber that

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Forest Landowners’ Guide to the Federal Income Tax 137

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affect its value, such as total quantity, disregarded for purposes of making a completed within the tax year. Follow

species, quality, quantity per acre, subsequent election. Unless this the format of lines 1 through 8 on

size of the average tree, logging special rule applies, or the election additional sheets if necessary.

conditions, and distance to markets. was made for a tax year beginning

before 1987, you can only revoke a Valuation evidence. The records Part IV. Reforestation

must provide evidence in the form of section 631(a) election with IRS

consent. and Timber Stand actual sales of comparable timber as

of the valuation date, along with other Activities

valuation evidence used. Include a Part III. Profit or Loss Summarize your expenditures for computation showing the difference From Land and Timber reforestation and timber stand between the cost (excluding timber or activities during the tax year. Timber stumpage cost) and value of the Sales stand activities include all silvicultural primary wood product (logs or other Complete this part to report all prescriptions (such as burning, roundwood, chips, etc.) at the mill or dispositions of timber, timber-cutting spraying, and thinning) applied to a plant. Give detailed evidence that contracts, or forest land during the tax timber stand regardless of age. permits a comparison with the timber year (whether taxable or not). Do not on which you report a value. report dispositions by gift or Line 4a. Reforestation

Additional information. The records distributions made by an estate or to Expenses must include the following additional a beneficiary. By entering an amount on this line, information: Report each sale involving total you are indicating that you have 1. Location of the sawmill, log consideration of $10,000 or more. elected to deduct qualifying market, or other point of delivery of You may combine sales of less than reforestation expenses that were paid the logs or wood to the user or buyer. $10,000 for each timber or land or incurred after October 22, 2004, for 2. The total MBF, log scale, cords, account and omit lines 2 and 3 for each qualified timber property under or other units of timber cut, and the each combined small sale. section 194(b). You must complete length and diameter of the average Outright sales of timber after line 1 of Part IV listing the following: log or the average number of units December 31, 2004. New rules • The account, block, tract, area or per tree. under section 631(b) allow the stand identification number for each 3. The percentage of rough landowner to treat outright sales of qualified timber property (QTP); lumber grades, by species, timber after 2004 as capital gain. The • The kind of activity (burning, manufactured from the timber during new rules extending capital gains chopping, spraying, planting, seeding, the year, or, if cut timber is sold as treatment to outright sales of timber thinning, pruning, fertilizing, etc.); logs, the percentage of log grades, by are similar to certain disposals of • The number of acres treated; and species. timber under a contract with a • The total expenditures.

retained economic interest. However, Timber owned or held under a The aggregate amount of for outright sales, the date of disposal contract right to cut. Show the reforestation expenses which can be is not deemed to be the date timber is amount of timber owned, or held claimed on line 4a for any tax year cut because the owner may elect to under a contract right to cut, for a cannot exceed $10,000 ($5,000 if treat the payment date as the date of period of more than 1 year. Show your filing status is married filing disposal. For more information, see separately the quantity of timber cut separately) for each qualified timber section 631(b) and Pub. 544. that was held for less than 1 year. property for any tax year. The The scale of logs purchased during Timber-cutting contract. For a sale remaining costs (line 4b) can be the year must be shown by species or lease of timber-cutting rights on a amortized over an 84-month period and quantity and excluded from the pay-as-cut basis, that will be paid for using the half-year convention under quantity shown as cut under section at intervals during the cutting period section 194(a). For more information 631(a) in Part II, line 17. Also show according to the number of units cut, on reforestation costs, see Pub. 535.

the number, cost, and point of complete lines 4, 7, and 8, only for

delivery of purchased logs by species accounts that must be reported on If you do not elect to deduct

and grade. your current year income tax return. reforestation expenses under section

194(b), all reforestation expenses will Instead of completing lines 5a, 5b, Line 18b be capitalized in a deferred timber and 6, briefly state the provisions of depletion account. If you are revoking your 631(a) the sale or lease agreement, election, check the “Yes” box. including the number of years from Reforestation expenses are direct

If you made a section 631(a) the effective date to the expiration costs incurred for reforestation by

election for any tax year ending date, annual minimum cut or planting or artificial or natural

before October 23, 2004, you can payment, and the payment rates for seeding. This includes costs for the

revoke that election without the the different kinds of timber and forest preparation of the site, of seeds or

consent of the IRS for any tax year products. You may combine small seedlings, and for labor and tools,

ending after October 22, 2004. The sales or leases of timber-cutting including depreciation of equipment

prior election (and revocation) is rights on a pay-as-cut basis that were such as tractors, trucks, tree planters,

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138 Forest Landowners’ Guide to the Federal Income Tax

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and similar machines used in planting complex. Report contract work You are required to give us the

or seeding. separately from your employees’ information. We need it to ensure that

Reimbursements under work. you are complying with these laws

governmental reforestation and to allow us to figure and collect Planting or seeding. Report the cost-sharing programs. If you have the right amount of tax. Section 6109 expenses you incurred during the tax been reimbursed under any requires return preparers to provide year for planting seedlings or sowing governmental reforestation their identifying numbers on the seed to reforest the land. Report this cost-sharing program, you may not return. information separately for each claim these expenses unless the unique stand identifier, depletion You are not required to provide the amount reimbursed has been account, block, tract, or operating information requested on a form that included in your income. area tributary to a mill or mill is subject to the Paperwork Reduction Qualified timber property (QTP). complex. Report contract work Act unless the form displays a valid Any qualified timber property subject separately from your employees’ OMB control number. Books or to section 194(b) may not be work. records relating to a form or its combined with any other qualified Other silvicultural activities. instructions must be retained as long timber property account (depletion Report all expenditures that must be as their contents may become block) for which depletion is allowed capitalized and items that you elect to material in the administration of any or for casualty losses (that is, lines 13 capitalize. Also, list on a separate Internal Revenue law. Generally, tax and 14 of Part II) or other purposes. attachment items that are treated as returns and return information are The qualified timber property account current deductions (including, but not confidential, as required by section must be maintained until after the limited to, weed control, pruning, 6103. timber is disposed of through sale, fertilization, thinning, insect and harvest, or other transaction. The time needed to complete and disease control). Report this For each qualified timber property file this form will vary depending on information separately for each (QTP), keep detailed information to individual circumstances. The unique stand identifier, depletion support reforestation costs, showing estimated burden for individual account, block, tract, or operating treatments and dates of application. taxpayers filing this form is approved area tributary to a mill or mill Each qualified timber property is under OMB control number complex. Report contract work required to have a unique stand 1545-0074 and is included in the separately from your employees’ identifier. Retain this information for estimates shown in the instructions work.

your records. Report expenses such for their individual income tax return.

as supplies, labor, overhead, For more information, see section The estimated burden for all other

194 and Regulations section 1.194-3. transportation, tools, and depreciation taxpayers who file this form is shown

on equipment. below.

Site preparation. Report all Part V. Land Ownership Recordkeeping . . . . . . . . 34 hr., 12 min. expenses incurred during the tax year Complete this part to show all Learning about the law or for preparing the land for planting or changes in your land account, the form . . . . . . . . . . . . . 42 min.

seeding (including natural seeding). including sales or exchanges, during Preparing and sending the

Include expenses for clearing the form to the IRS . . . . . . . . . 1 hr., 17 min. the tax year. Attach as many land of brush and culling trees by additional sheets as needed,

burning, disking, chopping, shearing following the format of lines 1 through If you have comments concerning and piling, spraying with herbicides, 6. the accuracy of these time estimates or other measures taken to aid or suggestions for making this form successful site reforestation. Report simpler, we would be happy to hear this information separately for each Paperwork Reduction Act Notice. from you. See the instructions for the unique stand identifier, depletion We ask for the information on this tax return with which this form is filed.

account, block, tract, or operating form to carry out the Internal

area tributary to a mill or mill Revenue laws of the United States.

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Forest Landowners’ Guide to the Federal Income Tax 139

These annotations supplement the instructions included on 

Internal Revenue Service (IRS) Form T itself and in the accompanying IRS instructions for Form T. You should read those 

sources first. These annotations provide additional detail focusing on timber accounts.

Purpose. The purpose of IRS Form T is to provide information on timber accounts for your records and to be filed with 

your tax return when required. You are encouraged to complete 

Form T whether or not you are required to file it.

Who Must File. Complete and attach IRS Form T to your 

tax return only if you (1) claim a deduction for depletion of 

cut timber, or the allowable basis of timber disposed of on the 

stump under IRC section 631(b); (2) elect under IRC section 

631(a) to treat the cutting of timber as a sale or exchange; or 

(3) make an outright sale of timber under section 631(b), that 

is, timber held for use in a trade or business, or primarily for 

sale to customers in the ordinary course of a trade or business.

Exceptions to Filing Requirement. If your timber is held as 

an investment, not as part of a business, you are not required 

to file IRS Form T. This will be the case if you only make an 

occasional sale of timber (one or two sales every 3 or 4 years). 

You are, however, required to maintain records which, at a 

minimum, provide the information included on Form T. Thus, 

it is recommended that you complete the applicable Parts of 

Form T even if you are not required to file it with your return 

for the current tax year. The completed form should be maintained in your records

Recordkeeping Requirements. The information entered on 

IRS Form T is summary information based on the detailed 

records you need to keep to justify the information entered on 

Form T. Records dealing with the basis of assets must be maintained for as long as you own the asset and at least three years 

after the assets are disposed of. If you plan on gifting your forest land your basis passes to the recipient. They will need your 

records to establish their accounts.

Entries on IRS Form T

Identification

Name(s) as shown on return

Enter the name of the taxpayer or business with which the 

forest land is associated. If the form is attached to IRS Form 

1040 enter the taxpayer’s name and that of the spouse if jointly 

owned. If the form is attached to a business schedule, enter the 

name of the business as recorded in IRS records and shown on 

the business tax return.

Identifying number

Enter the employer identification number for a business, or the 

social security number of the person whose name appears first 

in the “names” block.

Part I. Acquisitions

This part of IRS Form T is used to record the acquisition of timber, timber-cutting contracts, or forest land during the tax year, 

whether the acquisition was by purchase, exchange, gift, or inheritance. You should record how you acquired it, the accounts 

to which basis is assigned, and the amount of basis assigned to 

each account as its opening balance.

1. Name of block and title of account

The structure of your timber accounts is an important consideration when you acquire forest land. A block is a specific area of 

land identified on maps included in records. It could be a single 

tract, or multiple tracts. In general, all the tracts that are managed as a unit and feed into a specific timber marketing region 

constitute a single block. Note that on lines 9d and 9e, the 

timber account may include two subaccounts, the merchantable 

timber subaccount, and the premerchantable timber subaccount. 

These subaccounts may be further subdivided. You should use 

a separate Part I for each timber account within a block. Each 

merchantable timber account consists of two parts—dollar basis 

and associated timber volume. The following are possible account structures:

One block and one timber account

If all your timber is in one account then the block and timber 

account are the same. Enter a name that clearly indicates who 

Appendix D. Annotations for IRS Form T (Timber)
140 Forest Landowners’ Guide to the Federal Income Tax

owns the timber and land. For example, you might refer to your 

land as the Jones Tree Farm, the Smith Timber Tract, etc. Be 

certain to use this name consistently in your records. Also, you 

are required to maintain separate accounts with a unique stand 

identifier (USI) for each qualified timber property (QTP) for 

which the reforestation expenses are deducted or amortized. 

USIs must be maintained even if the dollar basis is zero because the expenses were deducted or amortized.

One block and multiple timber accounts

All your timber may be in one block, but you have multiple 

subaccounts. For example, the block may consist of several 

tracts with individual merchantable timber subaccounts because 

of differences in timber type. You may also have multiple subaccounts for young growth.

Multiple blocks

If your timber is in multiple blocks you will have one or more 

timber accounts for each block.

2. Location of property (by legal subdivisions or map 

surveys)

Enter sufficient information to allow another person to find 

your property on a map, and then on the ground. At a minimum 

enter the State, county/parish, and township. You also can refer 

to the key number(s) used by the taxing jurisdictions to identify your ownerships. Your files should include a detailed legal 

description and a map of the general location of the tract(s) and 

more detailed maps of each tract.

3a. Name and address of seller or person from whom 

property was acquired

Purchase—Enter the name and address of the seller as of the 

date of the purchase.

Inherit—Enter the name and legal address of the deceased as of 

date of death.

Gift—Enter the name(s) of the person(s) making the gift and 

their address on the date of the gift.

3b. Date acquired

Enter the date you took title to the property.

4. Amount paid

If you inherited the property or received it as a gift skip this line 

and lines 5 through 7.

4a. In cash

Enter the amount you paid in cash from your own account and 

any amount borrowed from a third party, such as a bank. If you 

purchased the property at less than fair market value, a bargain 

sale, report the amount paid in cash or notes. Most likely this 

will be your total original basis.

4b. In interest-bearing notes

Enter the amount you paid in the form of a loan from the seller 

that requires the payment of interest.

4c. In non-interest bearing notes

Enter the amount you paid in the form of a loan from the 

seller that does not require you to pay interest on the amount 

borrowed.

5a. Amount of other consideration

Report the value of any property you owned that you transferred to the seller to cover in whole or in part the sales price of 

the property you received.

5b. Explain the nature of other consideration and how 

you determined the amount shown on line 5a.

Describe the property transferred and how you determined 

its value. Maintain in your records documents justifying this 

value. If the property is not traded in an established market for 

which prices are reported on a regular basis, such as publicly 

traded stock, a professional appraisal may be needed.

6. Legal expenses

Enter fees paid for legal advice and services, transfer taxes, 

recording fees and any other costs incurred to take title to the 

property.

7. Cruising, surveying, and other acquisition expenses

Enter nonlegal costs incurred to determine the value of the 

property acquired, cost to cruise the timber to determine its volume and value, and for allocation of the original basis.

Note that because lines 4 through 7 do not apply to property 

acquired by gift or inheritance, legal and other costs associated 

with taking ownership of such property are treated as “other expenses,” which may either be deducted or capitalized. Expenses 

you elect to capitalize are shown on Part II of IRS Form T, line 6, 

discussed in the following section.
Forest Landowners’ Guide to the Federal Income Tax 141

8. Total cost or other basis of property. Add lines 4a 

through 7

The total cost of acquiring the timber or forest land, including 

cash and/or notes paid, other consideration given, and costs 

directly related to the acquisition.

9. Allocation of total cost or other basis on books: 

Unit, Number of units, Cost or other basis per unit, 

Total cost or other basis

This section is used to report the assets you acquired by purchase or inheritance. If you received the property as a gift your 

basis is the donor’s basis on the date of the gift with potentially 

an adjustment for gift tax paid. If the donor never allocated 

their basis among the assets you may be able to justify making 

an allocation of the donor’s total basis. You will need to do the 

calculations separately and report the results on lines 9a to 9h. 

Be certain to keep in your records the worksheets used to make 

the calculations, or a printout of the spreadsheet or calculations 

from the National Timber Tax Web site.

9a. Forested land

Forested land is the acreage containing existing stands of timber, cutover forest land, or land upon which you will establish 

stands of timber.

9b. Other unimproved land

Other unimproved land is crop, pasture, or land managed strictly for wildlife habitat.

9c. Improved land (describe)

Improved land is the land associated with buildings, including 

that associated with a residence. The land for improved roads 

and drainage systems should be included in the acreage for the 

forest land, or other unimproved land that they are on.

9d. Merchantable timber

Merchantable timber is timber for which a market value could 

be established on the date of acquisition. If you use average 

depletion, that is, all merchantable timber in one account, then 

enter the total volume of timber on 1 line. If you establish subaccounts enter each subaccount on a separate line. Subaccounts 

may be used if your forest land is to be managed as more than 

1 timber stand or other management unit. You also may have 

separate subaccounts for pulpwood, sawtimber, poles, or other 

product classes of merchantable timber.

9e. Premerchantable timber

You are required to allocate basis to any acreage that contained 

timber that existed on the date of acquisition, but was not big 

enough to be merchantable. One example is acreage with one or 

more plantations that have not reached merchantable size; but 

if premerchantable naturally seeded timber in a nonplantation 

stand contributes to the overall value of the stand an allocation 

should be made for it, as well. The unit for premerchantable 

timber is acres.

9f. Improvements (list separately)

Enter separately each improvement on the property acquired. 

Include both depreciable and nondepreciable improvements, 

such as storage buildings and garages for equipment, drainage 

structures, fences, and roads. If your primary or secondary residence and associated buildings are included in the acquisition 

you should be certain that they are listed separately.

9g. Mineral rights

List only if the acquisition included proven reserves or working 

interests in oil or gas, hard minerals, sand and gravel, or other 

minerals. Professional assistance will be needed to appraise 

such interests.

9h. Total cost or other basis (same amount as line 8). 

Add lines 9a through 9g 

The total allocated to all the assets reported must add to the total amount of the basis shown on line 8.

Part II. Timber Depletion

This part of IRS Form T is used to show changes to your merchantable timber accounts, determine the depletion unit needed 

to claim an allowance for depletion for a disposal, how timber 

was disposed of, and elect Internal Revenue Code (IRC) section 

631(a) treatment on timber you cut yourself. Other timber accounts, such as premerchantable timber, deferred reforestation, 

and amortization are maintained separately in your books.

1. Name of block and title of account 

Enter the name of the block and title of the timber account to be 

reported. You will need a separate Part II for each separate timber account. Show the units used to record volumes.
142 Forest Landowners’ Guide to the Federal Income Tax

2. Estimated quantity of timber and cost or other 

basis returnable through depletion at end of the 

preceding tax year

The preceding instruction applies literally if you make annual 

adjustments to your timber accounts. If you make adjustments 

only as needed, then enter the quantity and basis as of the last 

year you adjusted the account. In this case, when the term 

“year” is used in the discussion in the following paragraphs, it 

means since the last year the account was adjusted for volume, 

or for additions to or recovery of basis.

3. Increase or decrease of quantity of timber required 

by way of correction

You will have an entry here only if you determine that it is 

necessary to make a correction because the volume previously 

reported was estimated incorrectly. Note that this correction 

will affect the depletion unit but cannot be used to change the 

original basis allocated to the timber accounts except in very 

unusual circumstances.

4a. Addition for growth (number of years 

covered > ______ )

Your forester may have provided you with an estimate of the annual growth for the timber in each of your timber accounts. More 

commonly, however, your forester will estimate the total volume 

of timber in the account for the year in which the depletion unit 

is needed. In this case, the amount entered will be the difference 

between the volume on line 2, and the current volume.

4b. Transfers from premerchantable timber account

If the timber on tracts of premerchantable timber to which basis 

was assigned in a young growth account becomes large enough 

to be merchantable, the basis assigned is transferred to either a 

new merchantable timber account, or to an existing account if 

average depletion is used. It will be necessary to estimate the 

volume of timber on the tract so that you can adjust the quantity 

(column a) as well as the basis (column b). This is because the 

unit for young growth accounts is acreage.

4c. Transfers from deferred reforestation account

If you capitalized reforestation costs instead of recovering them 

by deduction or amortization, and the timber on the reforested 

tract became of merchantable size since the last adjustment to 

the merchantable timber account, the basis is transferred to the 

merchantable timber account for average depletion (see glossary, “Average depletion unit”), or a new merchantable timber 

account. It is necessary to estimate the volume of timber so that 

the quantity (column a) as well as the basis (column b) can be 

entered.

5. Timber acquired during tax year

If additional forest land with merchantable timber was acquired 

and you use average depletion, enter the quantity of merchantable timber and the allocated basis for this timber. Separate 

merchantable timber accounts could be established for newly 

acquired tracts in a given block.

6. Addition to capital during tax year

Enter the amount of any expenses incurred to improve the timber if the expense was not deducted in the tax year incurred. An 

example would be the cost of a precommercial thinning, pruning, or timber stand improvement if you elected to capitalize 

these costs instead of deducting them in the year they occurred. 

Carrying costs that were capitalized instead of expensed also 

would be entered.

7. Total at end of tax year, before depletion, add lines 

2 through 6

These are the total volume and dollar basis used to calculate the 

depletion unit for the year.

8. Unit rate returnable through depletion, or basis of 

sales or losses. Divide line 7, column (b), by line 7, 

column (a)

This amount is the depletion unit. The phrase “returnable 

through depletion” refers to the use of the depletion unit to determine the depletion allowance for timber cut by the owner or 

under a contract with a logger that constitutes a logging service 

contract, but not a contract right to cut. The term “basis of sales 

or losses” refers to the use of the depletion unit to determine 

the basis of timber you dispose of on the stump for a lump-sum 

amount, or under a “pay as cut contract,” or that is subject to an 

involuntary conversion such as fire, tornado or hurricane. The 

calculations are the same for depletion and basis allowable, but 

the statutory authority for the recovery of the basis allowable is 

different than for depletion.

9. Quantity of timber cut during the tax year

For timber that you owned outright or had a contract right to 

cut, report the volume that you cut yourself or using your employees, or cut by a logger under a logging service contract. A 

logging services contract is used by loggers who function as 
Forest Landowners’ Guide to the Federal Income Tax 143

independent contractors that cut timber that you own. The logger does not become the owner of the timber itself or the logs 

he produces, that is, he has no contract right to cut the timber 

for his own account.

10. Depletion for the current tax year. Multiply line 8 

by line 9

This amount is the depletion allowance for the timber you cut 

yourself or under a logging services contract.

11. Quantity of standing timber sold or otherwise 

disposed of during tax year

Report the volume of standing timber sold under a lump-sum 

contract, under a pay-as-cut contract, or for which you granted 

a logger or other party a contract right to cut the timber for 

their own account.

12. Allowable as basis of sale. Multiply line 8 by line 11

The basis allowable for the sale or other disposal is the depletion unit, times the units disposed of lump sum or under a payas-cut contract.

13. Quantity of standing timber lost by fire or other 

cause during the tax year

Report the volume of timber that was destroyed by fire, tornado, hurricane or other casualty. The volume of timber damaged

but not destroyed should not be included here, but recorded 

and kept in your records. Timber destroyed is not salvageable, 

but damaged timber usually can be sold if it is of merchantable 

size. The services of a consulting forester generally are needed 

to make this determination.

14. Allowable basis of loss plus any excess amount 

where decrease in FMV (before and after the casualty) exceeds the standard depletion amount, but not 

the block basis (see instructions)

The rules for determining the amount you can claim as the 

allowable basis for a casualty loss may exceed the amount obtained by multiplying the depletion unit by the units destroyed. 

This will be the case if the change in the fair market value 

(FMV) of the timber destroyed is less than the adjusted basis of 

the timber for the entire block in which the timber destroyed is 

included.

15. Total reductions during the tax year

15a. In column (a), add lines 9, 11, and 13

This amount is the total volume of timber cut, sold or involuntarily converted during the year. In 1 year, the timber in the 

same block or timber account can of course be disposed of in a 

number of different ways.

15b. In column (b), add lines 10, 12, and 14

Add the total amount of basis recovered for the year.

16. Net quantity and value at the end of tax year. In 

column (a), subtract line 15a from line 7. In column 

(b), subtract line 15b from line 7

The volume and value at the beginning of the year or since the 

last adjustment is reduced by the volume and value recovered 

this year.

17. Quantity of cut timber that was sold as logs or 

other rough products

If you cut your timber yourself, or with a logging services contract, report the volume of logs or other timber-based products 

that you actually sold during the year. Any volume of cut products not sold is carried over to the next year as inventory in a 

separate inventory account.

18. Section 631(a)

18a. Are you electing, or have you made an election 

in a prior tax year that is in effect, to report gains 

or losses from the cutting of timber under section 

631(a)? (see instructions) Yes/No

It may be to your advantage to report the cutting of your timber 

in two parts: the gain on the FMV of the timber cut, and the 

ordinary income from the processing of the timber cut. If you 

made this election in a previous year you must report any timber cut this year under IRC section 631(a) unless you revoke 

this treatment on line 18b.

18b. Are you revoking your section 631(a) election 

(see instructions)? Yes/No

If you have an election already in effect and are reporting the 

cutting under IRC section 631(a) check the NO box; if you have 

an election in effect and are revoking it for timber cut this year 
144 Forest Landowners’ Guide to the Federal Income Tax

check the YES box. You generally may revoke a section 631(a) 

election only by permission from the Commissioner of Internal 

Revenue, and permission is granted only where there is a showing of undue hardship. The 1986 Tax Reform Act (P.L. 99-514) 

and American Jobs Creation Act of 2004 (P.L. 108–357), however, provide qualifying timber owners one-time exceptions to 

this rule (see chapter 5, “IRC Section 631(a) Cutting of Standing Timber With an Election to Treat as a Sale”).

Part III. Profit or Loss From Land and 

Timber Sales (see instructions)

1. Name of block and title of account

You report here only the information for the timber sold from 

the block and timber account associated with that timber. If a 

single sale involves timber from more than one block, or timber 

account within a block, complete separate Parts II and III for 

each block and timber account from which timber was sold. 

The block and name entered should be the same as that entered 

in Part II, line 1.

2. Location of property (by legal subdivisions or map 

surveys)

Enter enough detail to allow someone to find the property from 

which the timber was sold. This will be the same legal description used to complete Part I, line 2.

3a. Purchaser’s name and address

Report the name and address of the person or business with 

which you have a binding contract, generally the original 

contract. Other parties may be involved in the sale, such as a 

logger working under contract to the buyer of your timber. The 

original buyer also may have granted a contract right to cut to 

a second party. Unless your original contract restricts such subcontracts, subcontracts are not uncommon in many regions of 

the United States.

3b. Date of sale

For a lump-sum sale report the date the contract became binding, usually the date of signing and payment of adequate 

consideration under State law. For timber disposed of under a 

pay-as-cut contract also report the date the contract becomes 

binding. However, if your timber is not considered to be cut 

until a later date under the provisions of IRC section 631(a) or 

(b), also report the earliest date in the year that timber was considered cut.

4. Amount received

4a. In cash

Report the amount received in currency or other cash equivalent, including checks, or other payment instruments.

4b. In interest-bearing notes

Report the total amount you will receive in deferred payments specified in the contract that will pay you interest on the 

amount deferred. This includes payments due the next and later 

tax years.

4c. In non-interest-bearing notes

Report the total amount you will receive in deferred payments 

specified in the contract that will not pay you interest on the 

amount deferred. This includes payments due the next and later 

tax years. Note that under certain circumstances you will need 

to impute interest to be reported as ordinary income, thereby 

reducing your capital gain. These provisions come under the 

installment sale rules, discussed in chapter 9 and in IRS Publication 537, Installment Sales.

5a. Amount of other consideration

Report the fair market value of anything of value received as 

complete or partial payment for the timber or other assets disposed of. This includes barter type exchanges, or exchanges of 

property that will be reported as like-kind exchanges under IRC 

section 1031.

5b. Explain the nature of other consideration and how 

you determined the amount shown on line 5a

Describe the property received and how you determined its 

value. If it is property traded on an established exchange, like 

one of the stock markets, report the closing price for the day 

that you received title to the property. In other cases, it will be 

necessary to conduct an independent appraisal. Keep the appraisal report in your files.

6. Total amount received for property. Add lines 4a, 

4b, 4c, and 5a

This is the total amount received or to be received eventually 

for the timber or property you sold or otherwise disposed of.
Forest Landowners’ Guide to the Federal Income Tax 145

7. Cost or other basis of property: Unit, Number of 

units, Cost or other basis per unit, Total cost or other 

basis

7 a. Forested land

The unit is acres. Report the number of acres disposed of, the 

unit cost or other basis per unit obtained from your IRS Form T 

Part I completed for the acquisition of the land, and multiply to 

get the total basis.

7b. Nonforested land

Same as previously described

7c. Improved land (describe)

This is crop, pasture, and other land not used for timber production or unmanaged wildlife habitat.

7d. Merchantable timber

The easiest way to provide the information requested is to attach a copy of the timber sale specification data that were provided to potential buyers. If you sold timber with the help of 

a consulting forester, he or she would have provided you with 

a copy of the specification sheet. Otherwise, provide as much 

information as you have at hand.

7e. Premerchantable timber

Make an entry here if you sold timberland that contained premerchantable timber to which you allocated basis to a young 

growth account when the timberland was acquired. Because the 

young growth timber was sold with the land, you recover your 

basis in this timber. This also would be the case if you sold 

timberland that contained plantations that you established by 

planting or otherwise to which establishment costs were capitalized and are still in the plantation (deferred reforestation) 

subaccount. The unit in these cases will be acres.

7f. Improvements (list separately)

When you established your capital accounts you may have assigned basis to buildings, drainage structures, fences or other 

“improvements.” If these improvements were disposed of with 

the land, or in rare cases separately, any basis remaining in the 

accounts for these improvements is reported here.

7g. Mineral rights

If basis was allocated separately to mineral rights at the time of 

acquisition, or such rights were purchased separately, report the 

number of units disposed of and the unit basis.

7h. Total cost or other basis, add lines 7a through 7g

This is the total basis that you are claiming for the assets disposed of.

7i. Direct sale expenses (cruising, marking, selling)

Report all costs you incurred to dispose of the property, including commissions paid to consulting foresters, brokers, legal 

fees, etc. These costs reduce your gain. They are not deducted 

as operating expenses.

8. Profit or loss. Subtract the sum of lines 7h and 7i 

from line 6

This amount is the net gain or loss on the disposal of the timber or other assets disposed of during the year. It may be the 

amount you report on your tax return for the year, but will not 

be if the disposal is reported as an installment sale, discussed in 

IRS Publication 537, Installment Sales, or under a pay-as-cut 

contract with cutting and payments coming after the tax year of 

the sale, which does not constitute an installment sale.

Part IV. Reforestation and Timber Stand 

Activities (see instructions)

1. Account block, tract, area, or stand ID for each 

Qualified Timber Property (QTP)

There is no generally accepted definition of what constitutes a 

QTP. The only reasons to have more than one QTP, however, 

are if you have divided your forest holding into two or more 

“blocks” (chapter 7) or if you wish to deduct outright more than 

$10,000 of qualified reforestation expenses in a single year. After you have established a QTP for IRC section 194 purposes, 

the included timber property may not be combined with any 

other timber account for the purposes of calculating a depletion 

deduction under IRC section 611 or a loss deduction under IRC 

section 165(a). All records relating to a QTP account should be 

maintained until the timber is disposed of through sale, harvest 

or other transaction. See section 322 of Notice 2006-47, 2006-1 

C.B. 892, for additional requirements regarding the accounting 

treatment of QTPs. You can report all your projects in this part, 

not only for the block shown in Parts I to III. List each QTP 

separately, using its unique identifier.

1. Kind of activity (burning, chopping, spraying, planting, seeding, thinning, pruning, fertilizing, etc.)

Use a separate line for each QTP reforestation project, and for 

each other timber stand activity in each block.
146 Forest Landowners’ Guide to the Federal Income Tax

1. Number of acres treated

Report the number of acres reforested or acres of timber treated.

Total expenditures

Report the total cost for each project.

2. Total

Sum acres treated, and sum expenditures for each treatment.

3. Total reforestation expenses

Sum the total expenditures for all the reforestation projects 

listed in line 1 entries.

4a. Amount to be expensed under section 194(b) (See 

instructions for limitations) 

You are limited to $10,000 per year per QTP ($5,000 if you are 

a married individual filing a separate return). This is why it is 

important to list each project separately in line 1 entries.

4b. Amount to be amortized under IRC 194(a), 

including remaining reforestation expenditures not 

expensed under section 194(b)

If your reforestation expenditure in a given year for a given 

QTP exceeds the limits given in the discussion for line 4a 

($10,000 per year per QTP, $5,000 if you are a married individual filing a separate return), any balance over the limit can 

be amortized. Report these amounts for all your QTP’s for a 

given block and account for which reforestation expenditures 

exceeded the limit. The amounts for each QTP can be totaled 

and included in one amortization schedule; remember, however, 

that you must maintain separate records for each QTP until the 

timber is disposed of.

Part V. Land Ownership

Show all changes in land account. Attach as many additional 

sheets as needed, following the format of lines 1 through 6.

1. Name of block and title of account

Acres

Report number of acres included in the account.

Total cost or other basis. Give amount of March 1, 

1913 appreciation, if included.

The basis normally will be your acquisition cost for the tract. 

If acquired by inheritance, exchange, or some other way other 

than outright purchase, see chapter 4, “Original and Adjusted 

Basis.” The reference to 1913 relates to the basis of assets 

owned by the taxpayer on March 1, 1913, when the Federal 

income tax first came into effect. The original basis of these 

assets was their value on this date.

Average rate per acre

Divide total cost by acres.

2. Balance at beginning of year

Report the balance at the beginning of the year or that last year 

for which a balance was changed.

3. Acquisitions during the year

Report purchases or other acquisitions during the year or since 

the last time the account was adjusted. What is included here 

are additional tracts of land that are added to an existing block 

and timber account. If a new account is established for an acquisition, it should be reported on a separate Part V.

4. Sales during year

Report acres sold and the basis of this acreage.

5. Other changes

This would include land that is given up or acquired as part of 

an exchange, land that is lost due to boundary adjustments, and 

other uncommon circumstances.

6. Balance at end of year. Add lines 2 and 3, subtract 

line 4 and add or subtract line 5.

Additional Information

Use this section to provide a description of changes that are 

unusual or for which additional information is needed to understand entries in lines 1 to 5.
Forest Landowners’ Guide to the Federal Income Tax 147

A

Accounting methods ........................................................... 101

Accounts—Also see specific account.............................12, 104

Accrual accounting ........................................................79, 101

Active income or loss—Also see Material participation....... 87

Adjusted basis..................................9, 18, 23, 31, 126, 130, 143

Administrative law................................................................ 89

Afforestation expenses........................ See Establishment costs

Agricultural Conservation Program (ACP) .......................... 44

Allocation of original basis...................................... 10, 12, 140

Allowable basis................................32, 60, 62, 72, 73, 139, 143

Alternate valuation date .......................................................... 9

Alternative minimum tax ................................................ 21, 73

Alternative minimum taxable income................................... 73

Appeals ................................................................................. 93

Appraisal................................................. 9, 42, 56, 68, 140, 144

Audits....................................................................... 86, 92, 101

Average depletion ................................................ 104, 141, 142

B

Bargain sales, basis of....................................................10, 140

Basis....9, 17, 18, 21, 23, 26, 28, 31, 32, 53, 57, 59, 60, 62, 69, 72, 

86, 125, 139

Block.................12, 57, 59, 60, 62, 130, 139, 141, 144, 145, 146

Brush control.......................................................... 13, 125, 126

Business expenses, recovering............13, 25, 27, 28, 62, 73, 79, 

125, 126

Business use, property held for..............See Trade or business, 

property held for use in

Byproducts—Also see Nontimber forest products.......... 49, 83

C

Capital accounts—Also see Accounts.......................9, 104, 145

Capital asset .................................... 9, 12, 36, 37, 80, 126, 127

Capital costs................................................................. 9, 26, 67

Capital gains and losses...........25, 29, 32, 36, 37, 38, 41, 67, 71, 

72, 73, 75, 80, 83, 126

Capital income accounts..................................................... 106

Capitalization ........................................ 9, 13, 26, 125, 128, 130

Capitalize versus deduct ...............................13, 15, 26, 29, 142

Carrying charges—Also see specific item.......25, 26, 27, 28, 79

Case law...........................................................................90, 91

Cash accounting.............................................................79, 101

Casualty losses................12, 13, 28, 56, 62, 63, 64, 67, 129, 143

C corporations.....................................................26, 28, 87, 129

Chips................................................................................49, 83

Christmas trees, as timber.......................................... 41, 75, 79

Christmas trees, expenses of producing.........................79, 125

Christmas trees, income from .................................. 75, 80, 126

Commercial tax services..................................................89, 98

Community property............................................................. 85

Condemnations .....................................................60, 62, 63, 64

Conservation easements...................................................68, 69

Conservation Reserve Program (CRP) .........13, 15, 44, 75, 128

Conservation Security Program (CSP) .................... 44, 47, 128

Consulting forester...........................12, 25, 31, 42, 57, 143, 145

Contract right to cut timber............... 42, 81, 126, 127, 128, 142

Conversion cost.....................................See Cost of conversion

Co-ownership...................................................................85, 86

Corporations—Also see C corporations and Subchapter S 

corporations.......................................... 26, 28, 29, 32, 86, 129

Cost of conversion ................................................................ 42

Costs—Also see specific cost........... 9, 25, 28, 31, 62, 67, 73, 79

Cost-sharing payments..........15, 44, 47, 49, 50, 75, 98, 101, 128

Costs of acquisition.............................................9, 17, 140, 146

Costs of sale ...................................................................31, 145

Courts............................................................57, 89, 91, 93, 130

Cruising expense........................... See Timber cruise expenses

Cutting as a sale or exchange... 41, 75, 76, 80, 81, 127, 139, 143

Cutting contracts.................................................41, 42, 53, 126

Cutting rights .......................................... See Cutting contracts

D

Date of disposal.......................................................... 38, 41, 42

Deduct versus capitalize ...............................13, 15, 26, 29, 142

Deferred reforestation subaccount ....................... 105, 142, 145

Depletion deduction..............................................13, 32, 49, 73

Depletion unit........................................................... 32, 60, 142

Depreciable land improvement account................. 12, 106, 125

Depreciation accounts..................................................106, 125

Depreciation deductions.......................12, 16, 20, 21, 22, 25, 67

Disease control expenses ...............................................25, 126

Disease, losses due to............................................................ 56

Index
148 Forest Landowners’ Guide to the Federal Income Tax

Disposal with economic interest retained....38, 49, 71, 126, 127

Disposition of depreciated property...................................... 25

Drought, damage due to.............................. 13, 56, 61, 62, 129

E

Easements—Also see Conservation easements ...............60, 61

Economic interest, defined.............................................38, 114

Elections by taxpayer....13, 16, 21, 22, 26, 28, 29, 38, 41, 49, 63, 

72, 74, 75, 76, 79, 80, 81, 87, 91, 126, 127, 128, 139, 141

Electronic tax filing..........................................................49, 98

Employee ................................................................. 74, 76, 142

Environmental Quality Incentives Program (EQIP)..... 44, 129

Equipment.........................9, 12, 13, 17, 18, 20, 51, 57, 125, 141

Equipment accounts............................................... 13, 106, 126

Escrow accounts.................................................................... 71

Establishment costs.... 9, 12, 13, 31, 79, 101, 105, 125, 126, 140, 

142, 145, 146

Estates............................................. 9, 22, 26, 36, 67, 68, 69, 87

Evergreen trees, defined...................................................41, 79

Exchanges—Also see Like-kind exchanges... 10, 16, 25, 51, 63, 

101, 128, 129, 144, 146

Exclusion of cost-sharing payments ...15, 44, 47, 49, 50, 75, 98, 

128

Expense accounts................................................................ 106

Expenses—Also see specific item.......25, 27, 29, 56, 62, 67, 76, 

79, 84, 101, 128

Extension forester ................................................................... 1

F

Fair market value ............9, 10, 42, 47, 51, 53, 56, 71, 80, 81, 87, 

111, 125, 126, 127, 129, 140, 143, 144

Family limited partnerships—Also see Limited partnerships.. 8, 

115

Farming..................................................... 13, 17, 27, 71, 74, 79

Fire, losses due to...........................13, 55, 56, 62, 130, 142, 143

Fire protection expenses ................................................25, 126

Flood, losses due to............................................................... 56

Forester—Also see Consulting forester and 

Service forester ................................................10, 57, 77, 142

Forest Health Protection Program (FHPP) ................... 44, 129

Forest Land Enhancement Program (FLEP)......................... 44

Forestry Incentives Program (FIP)......................... 44, 126, 129

Form..............................................See specific IRS Form 1040

For profit, defined...........................................................25, 115

G

Gain or loss, how computed.......... 31, 32, 38, 41, 42, 51, 53, 56, 

57, 59, 60, 62, 63, 72, 73, 128, 129, 145

General asset accounts.......................................................... 19

General business accounts .................................................. 106

Gifts, basis of ...................................................................9, 141

Gross profit percentage ......................................................... 72

Growth, accounting for...............................10, 13, 31, 105, 142

H

Hobby-loss rule..................................................................... 25

Holding period ........................... 36, 37, 38, 41, 42, 51, 127, 128

Hurricane, losses due to ......................................... 56, 142, 143

I

Ice storm, losses due to ....................................................55, 56

Improvements to land ..................12, 16, 67, 106, 125, 141, 145

Independent contractor............................ 41, 42, 74, 76, 77, 143

Industry forester...................................................................... 1

Information returns—Also see specific return ......50, 77, 86, 87

Inherited property, basis of ...................................... 9, 141, 146

Insect control expenses..................................................25, 126

Insects, losses due to..................................56, 61, 62, 129, 130

Installment sales..................................................... 71, 101, 144

Insurance expenses...........................................................25, 62

Insurance, proceeds from................................56, 57, 58, 59, 73

Interest...............25, 26, 27, 28, 29, 47, 60, 72, 93, 106, 126, 128, 

140, 144

Internet tax assistance ........................................................... 98

Investment expenses, how to recover ........................ 28, 29, 67

Investment, property held for............................7, 19, 22, 28, 37, 

51, 52, 55, 56, 62, 64, 67

Involuntary conversions...16, 25, 53, 59, 63, 64, 79, 101, 129, 

142

IRC section 175 deduction...............................................13, 15

IRC section 179 deduction......................................... 18, 22, 25

IRC section 194 deduction—Also see Reforestation 

incentives........................................... 13, 15, 16, 98, 105, 146

IRC section 631(a) transaction..................37, 41, 49, 75, 76, 80, 

81, 83, 126, 127, 128, 139, 143, 144

IRC section 631(b) disposal......................36, 37, 38, 49, 50, 71, 

72, 75, 76, 80, 81, 126, 127, 128, 139, 144

IRC section 2032A..................................................... 27, 47, 71

IRS Form 706........................................................................ 69
Forest Landowners’ Guide to the Federal Income Tax 149

IRS Form 1040—Also see specific Schedule.......16, 49, 64, 73, 

74, 84, 94, 139

IRS Form 1040, Schedule A ...........16, 29, 58, 60, 62, 67, 73, 84

IRS Form 1040, Schedule C....................16, 28, 38, 43, 49, 61, 62, 

74, 84, 85

IRS Form 1040, Schedule D.......... 36, 37, 41, 53, 61, 64, 72, 84

IRS Form 1040, Schedule E.............................................86, 87

IRS Form 1040, Schedule F.....................16, 27, 38, 43, 49, 61, 62, 

74, 76, 84, 85

IRS Form 1040, Schedule SE .................................... 74, 75, 76

IRS Form 1040-A ................................................................. 94

IRS Form 1040-EZ ............................................................... 94

IRS Form 1040-X ................................................................. 94

IRS Form 1041...................................................................... 87

IRS Form 1065.................................................................74, 86

IRS Form 1065, Schedule K-1................................... 74, 86, 87

IRS Form 1099.................................................................50, 92

IRS Form 1099-G ............................................................48, 50

IRS Form 1099-MISC..................................................... 50, 77

IRS Form 1099-S.................................................................. 50

IRS Form 1120...................................................................... 87

IRS Form 1120-S .................................................................. 87

IRS Form 2297...................................................................... 91

IRS Form 2553...............................................................87, 122

IRS Form 2848...................................................................... 92

IRS Form 3115.............................................................102, 126

IRS Form 4562......................................................16, 19, 22, 23

IRS Form 4684........................................................... 58, 60, 64

IRS Form 4797..............23, 38, 41, 43, 49, 53, 58, 60, 61, 62, 64, 

72, 84

IRS Form 4952...................................................................... 29

IRS Form 6251.................................................................73, 74

IRS Form 6252...................................................................... 72

IRS Form 8283...................................................................... 68

IRS Form 8453...................................................................... 98

IRS Form 8582...................................................................... 28

IRS Form 8824...................................................................... 53

IRS Form 8949................................................................ 37, 38

IRS Form SS-8...................................................................... 77

IRS Form T (Timber)—Also see specific Part........... 15, 49, 72, 

98, 101

IRS Form T (Timber), Part I ................................................. 49

IRS Form T (Timber), Part II.................... 31, 38, 43, 49, 58, 60

IRS Form T (Timber), Part III..........................................38, 49

IRS Form T (Timber), Part IV ................................... 15, 16, 49

IRS Form T (Timber), Part V................................................ 49

IRS Form W-2..................................................................76, 92

IRS publications.................................................................... 97

J

Joint tenancy ......................................................................... 85

Journal..........................................................................102, 104

L

Land account.............................................12, 60, 104, 125, 146

Leases...................15, 26, 47, 52, 58, 63, 67, 71, 75, 83, 106, 128

Ledger ................................................................................. 104

Life estate.............................................................................. 85

Like-kind exchanges.................................16, 51, 101, 129, 144

Limbs, sale of.................................................................83, 127

Limited liability companies......................................... 8, 74, 87

Limited partnerships—Also see Family limited 

partnerships........................................................................ 86

Logging roads ................................................................21, 125

Longleaf Pine Initiative (LPI)..........See Conservation Reserve 

Program (CRP)

Losses.................. See Capital gains and losses, or Involuntary 

conversions

Lump-sum sale of timber—Also see Outright sale of timber 

held for investment, and Outright sale of timber held for 

business use.................. 32, 37, 50, 71, 76, 80, 128, 142, 144

M

Management expenses............................ 25, 26, 28, 67, 73, 101

Marking of timber..........................................................31, 145

Material participation...........................27, 28, 73, 74, 75, 79, 87

Merchantable timber......................... 32, 53, 105, 141, 142, 145

Merchantable timber subaccount ..........12, 13, 31, 32, 104, 139, 

141, 145

Minimum tax...............................See Alternative minimum tax

N

Noncasualty losses.................61, 62, 63, 64, 125, 129, 130, 143

Nontimber forest products ......................................... 49, 75, 83

O

Operating expenses—Also see specific item.........25, 27, 28, 79

Ordinary income accounts .................................................. 106

Ordinary income and losses....................................... 16, 49, 83
150 Forest Landowners’ Guide to the Federal Income Tax

Original basis................................................9, 10, 17, 105, 140

Outright sale of timber held for business use............. 36, 38, 80

Outright sale of timber held for investment.....................36, 37

Owner, defined ....................................................37, 41, 42, 127

P

Part I.......................................See IRS Form T (Timber), Part I

Part II ................................... See IRS Form T (Timber), Part II

Part III.................................See IRS Form T (Timber), Part III

Part IV.................................See IRS Form T (Timber), Part IV

Part V ...................................See IRS Form T (Timber), Part V

Partial destruction, losses due to......................................57, 58

Partnerships............................................... 26, 28, 74, 81, 86, 93

Passive activity................................................26, 28, 71, 73, 79

Passive income or loss.....................................................26, 28

Passive loss rules................................26, 28, 71, 74, 79, 87, 101

Personal use, property held for ...............................7, 19, 37, 55

Plantations, losses of ......See Premerchantable timber, losses of

Plantation subaccount ............................. 12, 13, 18, 31, 58, 105

Planting expenses.................................9, 12, 13, 15, 63, 79, 125

Portfolio income.................................................................... 28

Precommercial thinning....................................25, 26, 106, 142

Premerchantable timber, losses of ........................................ 57

Preproductive period............................................................. 79

Primarily for sale, timber held ....................... 37, 38, 51, 53, 61, 

71, 76, 80, 139

Profit, defined for timber investments............................25, 120

Property taxes.....................................25, 28, 29, 67, 73, 85, 106

Pruning expenses ..............................................26, 79, 125, 142

Purchased property, basis of .................................... 9, 141, 146

Q

Qualified timber property (QTP) ........13, 15, 16, 106, 140, 145

Quantity of timber, determination of .... 10, 38, 41, 42, 127, 128

R

Recapture of amortization deductions .................................. 16

Recapture of depreciation deductions................................... 25

Recapture of excluded cost-sharing payments...................... 49

Recapture of IRC section 179 deductions........................23, 25

Recapture of reforestation amortization deductions............. 79

Recordkeeping requirements ..............................20, 27, 97, 102

Reforestation account.....................................................15, 106

Reforestation costs......................................See Establishment costs

Reforestation costs, amortization of ............. See Reforestation 

tax incentives

Reforestation costs, current deduction of...... See Reforestation 

tax incentives

Reforestation tax credit......................................................... 13

Reforestation tax incentives............................13, 15, 31, 79, 98

Rental income ............................................................ 47, 71, 75

Retained economic interest—Also see Disposal with economic 

interest retained..................................................... 37, 38, 127

Revocation of IRC section 631(a) election..............43, 76, 144

Roads....................... 9, 12, 16, 21, 25, 63, 67, 106, 125, 126, 128

S

Sale, costs of .................................................. See Costs of sale

Sales, types of—Also see specific type ................32, 37, 38, 41, 

80, 81, 83

Salvage of damaged timber.................................57, 58, 63, 143

Scaling of logs...............................................31, 38, 42, 71, 127

Schedule A .............................See IRS Form 1040, Schedule A

Schedule C .............................See IRS Form 1040, Schedule C

Schedule D............................ See IRS Form 1040, Schedule D

Schedule E .............................See IRS Form 1040, Schedule E

Schedule F..............................See IRS Form 1040, Schedule F

Schedule K-1............................. See Form 1065, Schedule K-1

Section 631(a) transaction....See IRC section 631(a) transaction

Section 631(b) disposal..........See IRC section 631(b) disposal

Self-employment tax.............................................36, 49, 74, 83

Service contract, logging ...............................................42, 142

Service forester ..................................................................... 57

Shearing expenses..........................................................79, 125

Single identifiable property (SIP) ............................12, 57, 130

Site preparation expenses...................................................9, 12

Social security self-employment tax...........................See Selfemployment tax

Soil and water conservation expenses........................ 13, 44, 67

Sole ownership—Also see Sole proprietorship ..................... 85

Sole proprietorship..........................................27, 36, 74, 85, 86

Southern Pine Beetle Prevention Program (SPBP)...See Forest 

Health Protection Program (FHPP)

Special use valuation................................................4, 9, 27, 47

State Acres for Wildlife Enhancement (SAFE) ...................See

Conservation Reserve Program (CRP)

State conservation cost-sharing payments................. 44, 50, 75

State conservation cost-sharing programs ............................ 44
Forest Landowners’ Guide to the Federal Income Tax 151

Stepped-up basis ........................................................ 51, 69, 87

Stewardship Incentives Program (SIP)..........................44, 129

Storm, losses due to—Also see Hurricane, Ice storm, 

and Tornado...................................................................55, 56

Stumpage..........................................................................42, 53

Stumps............................................................... See Tree stumps

Subchapter S corporations .................... 26, 28, 87, 93, 126, 127

T

Taxes, deductible and nondeductible ....................25, 26, 29, 73

Tax preparation software..................................................73, 98

Tenancy by the entirety......................................................... 85

Tenancy in common.............................................................. 85

Theft losses .......................................................... 59, 62, 63, 64

Thinning expenses ....................................25, 26, 106, 125, 142

Timber accounts...................................... 12, 26, 31, 79, 98, 104

Timber cruise expenses.....................................31, 62, 140, 145

Timber deed .....................................................................37, 53

Timber, defined ...................................................41, 42, 79, 122

Timber owner............................................. See Owner, defined

Timber stand improvement (TSI) expenses........15, 26, 47, 142

Timber theft......................................................See Theft losses

Timber trespass................................................See Theft losses

Tops, sale of ...................................................................83, 127

Tornado, losses due to............................................ 56, 142, 143

Trade or business, property held for use in.............7, 17, 19, 22, 

23, 42, 51, 52, 53, 55, 56, 64, 67

Travel expenses........................................................ 25, 31, 106

Trees, damage to ...............................................38, 55, 130, 143

Tree stumps....................................................................83, 127

Trusts................................................................... 22, 26, 36, 87

U

Uniform capitalization rules (UNICAP rules) ............. 9, 17, 79

V

Valuation .................. See Alternate valuation date, Special use 

valuation, and Valuation date

Valuation date.................................................................. 9, 123

W

Western Bark Beetle Initiative (WBBI)........ See Forest Health 

Protection Program (FHPP)

Wetlands Reserve Program (WRP)............................... 44, 129

Wildlife Habitat Incentives Program (WHIP)............... 44, 129

Wildlife habitat management........................26, 44, 67, 68, 141

Wildlife habitat management expenses............................26, 67

Y

Year cut ................................................................................. 41

Year of deduction for a casualty loss.................................... 58

Year of deduction for a condemnation loss........................... 61

Year of deduction for a noncasualty loss.............................. 62

Year of deduction for a theft loss.......................................... 60

Young growth, losses of...............See Premerchantable timber, 

losses of

Young growth subaccount.............................12, 13, 31, 58, 105
152 Forest Landowners’ Guide to the Federal Income Tax

Forest Landowners’ Guide to the Federal Income Tax