Tax FAQs
Frequently asked questions
Can I deduct the cost of a road? It depends. The deciding factor is the nature of the road. If you’re maintaining an existing road, you can take a deduction (for example, for grading or adding gravel) and your expenses will be fully deductible. If you’re holding the timber as an investment, the deduction is limited to the amount that exceeds 2% of your adjusted gross income.
If you’re putting in a temporary road to harvest timber, then you may be able to recover the cost of the road through depreciation. The road should not be permanent and should be retired after the sale (you can retire a road by seeding it afterwards or not maintaining it). If your road is permanent, the cost of its construction should be capitalized, even if it’s used during your timber harvest.
The state requires me to replant after a harvest. Can I still take the reforestation deduction and amortization? Yes! It is important to separate federal and state requirements and rules. While the state forestry agency may require replanting, that is a separate issue from federal income tax law. In addition, the Internal Revenue Service is not aware of state-specific forestry laws.
Can I deduct the cost of replacing a culvert? The cost of a culvert is recovered through depreciation, with a 15-year recovery period.
If I use the reforestation deduction and amortization, will I have a basis in the timber later? Technically yes. Assuming no other capitalized expenses are incurred, after the final year of the amortization you will have a basis in the timber of zero. A basis of zero is still technically a basis.
This may seem like a bad thing, in that you will have to pay tax on the full gain in the future. But it’s important to realize that you recovered your investment on the front end. Those tax savings that were realized earlier through the deduction and amortization were funds that were available for other investments—your savings account, stocks, another capital project, or even another forestry project! It is better to get the tax savings earlier on and be able to reinvest those dollars than to wait for a sale to occur.
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