Setting up the Books: A Forest Owner's Guide to Capital Accounts and Record-keeping for Federal Income

Forest owners have a number of federal income tax incentives available to them. Growing timber can 2 be an income-producing activity, with the trees being considered a capital asset. Income from sales or other disposition of capital assets is then taxed at capital gains rates, as opposed to ordinary income tax rates. Investments in timber can be recovered through depletion deductions and reforestation expenses, qualifying for a tax credit. These provisions and others in the tax code encourage timber production, which is generally considered to be good for both the ecology and the economy. This publication will assist you in the first steps toward taking full advantage of these incentives.

“Setting up the books” refers to establishing capital accounts that are used to keep track of the basis and quantity of capital assets. Assets such as land, timber, buildings and equipment are capital assets. This means they are investments or used in a trade or business as income-producing property. Timber for income tax purposes is defined as: “The part of standing trees usable for lumber, pulpwood, veneer, poles, piling, crossties and other wood products.” (It also includes evergreen trees that are more than 6 years old when severed from their roots and sold for ornamental purposes, i.e., Christmas trees.)