Tax and Accounting Service for Logging and Timber Industry
There are many aspects to the logging and timber industry which are unique in business, and therefore also unique in tax accounting. For instance, by its very nature, timber as a business venture has a very long investment period, which corresponds to the length of time it takes for timber to mature, until it reaches the point where it can provide income through logging.
However, throughout the entire maturation phase, you may still incur annual costs, and this means it’s entirely possible that you may have no profits at all from your timber business, while sustaining significant losses through expense. This is just one reason that it is important to consult with a CPA familiar with the logging industry.
Accounting challenges unique to the logging and timber industry
Even though the IRS does not mandate that logging and timber companies maintain formalized book-keeping systems, it is highly recommended that you implement a system of record keeping on your own, or that you contact a knowledgeable and reputable accountant familiar with issues unique to the industry.
When trying to establish a cost basis for your business, you will need to factor in the purchase price of the land, the volume of timber which is salable, and the value of the timber which is salable. In order to substantiate all activities related to your business, you should maintain accurate records in the following areas:
- General ledger – all journal entries for every account in your system should be summarized in the general ledger, so balances for each one can be identified and can receive visibility.
- Cash accounting system – all detailed transactions associated with your business operation need to be listed in this system, whenever cash transactions are received in or paid out.
- Journaling system – this is more or less a diary of business transaction entries, including a description, an account identifier, and any monetary value associated with the transaction.
Other unique accounting issues in logging
- Management and operating expenses – any expenses necessary for day-to-day operations can be written off against current income, as long as business activities are engaged in for profit, and the expenses are tied to your property’s income potential.
- Reforestation expense – up to $10,000 worth of expenses may be written off as a deduction for the establishment of a commercial timber stand, and amounts over $10,000 may be amortized over 84 months.
- Depreciation – your timber or logging business is entitled to a depreciation deduction as a reasonable allowance for the wear and tear of property used in your timber business. You can also depreciate property used on your timberland for certain improvements such as roads, fences, buildings or bridges.
- Casualty losses – these are deductible losses if the casualty is caused by a natural force acting in a sudden manner, such as a tornado or a wildfire. Agents such as insects or disease are not considered casualties and are therefore ineligible for deduction.
One tax advantage that some logging businesses may want to take advantage of at some point is a conservation easement. A conservation easement is a unique legal agreement that offers advantages to large landowners. It permanently limits uses of the land in order to protect its conservation values. Landowners retain many of their rights, including the right to own and use the land, sell it, and pass it on to their heirs.
The IRS provides a tax deduction based on value reduction if certain conditions are met. A property owner can create a deductible conservation easement through donation. Click here to learn much more about the benefits of conservation easements and how they work.
Frequently Asked Questions on book-keeping or tax issues related to logging
Q: Is there any way I can deduct the purchase price of major pieces of equipment, so as to reduce my overall taxable income?
A: Yes, there is. The Section 179 Tax Deduction allows for a maximum deduction of $500,000 on new or used equipment, provided it is put into service within the tax year. In addition, there is a ceiling in place for up to $2,000,000 on all new equipment purchases, and there is a bonus depreciation of 50% also available after the spending cap is reached.
Q: Which types of income must be declared in the timber business?
A: There are three kinds of income which need to be declared if appropriate to circumstances: income from rental of the property, from the sale of logs or medicinal plants on the property, and from the disposal of ‘stumpage’, or standing timber.
Q: What accounting differences are there for my Christmas tree business, as opposed to a logging operation?
A: First of all, Christmas trees do not qualify for the reforestation amortization deduction, although all shearing and pruning costs incurred during a tax year are deductible
Q: If I exchange a timberland stand for another property, do I have to report it?
A: Any profit or loss from the exchange of timber properties must be reported to the IRS in the tax year of the exchange. A qualified like-kind exchange will allow a gain to be deferred.
Q: Where can I find a knowledgeable and experienced CPA who is familiar with the intricacies of the timber and logging business?
A: For the most thorough treatment of your timber business accounting needs, contact CPA Benjamin H. Johnson of Farmville, VA.