As a forest landowner, you must keep good records in order to take maximum advantage of the special tax treatments available for timber. At a minimum, you should keep a tree farm journal that lists all activities, costs, and incomes from the forest (see example below). You also should have accounts for land, timber, and other capital assets. When setting up timber basis accounts, it is a good idea to use Form T Forest Activities Schedule as a guide. It may be required when claiming depletion of the timber basis after a timber sale or loss. Claiming depletion will reduce the taxes paid on a timber sale or allow a loss to be deducted.
Business owners and investors with recurring operating costs, such as travel or equipment maintenance, may want to have operating accounts for various categories. The IRS does not require that records follow a certain format. Agricultural Handbook 718 Forest Landowner’s Guide to the Federal Income Tax has an excellent example of a double-entry bookkeeping system for a forest owner. Inexpensive software programs like Quicken or QuickBooks make it easy to set up and maintain business records. Small operations, and especially investors with small holdings, may be satisfied to keep records in a tree farm journal.
How Long to Keep Records
Basis accounts for land and timber, including reforestation and site preparation, should be maintained as long as the property is owned, plus 3 years. Basis is the book value of investment in a capital asset as recorded in a capital account such as land, timber, or equipment. The initial basis for a property depends on how it was acquired, as described later. The basis increases as non-deducted costs are capitalized into the account. The basis is reduced by use of tax credits, amortization, depreciation deductions, depletion, or sale of the asset. Initial basis should be determined for the timber account and updated when timber is sold, lost, or invested in. If the property is deeded to someone as a gift, these records should be passed on to the new owners because they will need this information to determine their timber basis.
Operating expense and income records should be kept for at least 6 years. If you want to determine the economic return from each forest investment, you may want to keep records for each separate parcel or timber stand. (A timber stand is a group of trees of similar size and species that will be treated as a management unit.) Business owners must keep records of the time spent on the forest business to prove material participation. These time records can be kept in the tree farm journal or in a business diary or calendar. They do not have to be provided to the IRS, but they may be required in case of an audit. Investors are not required to keep records of time spent on the forest investment.
From the Forestry Income Tax Series, Mississippi State University Extension, Publication 2307, September 2006, by Deborah A. Gaddis, Ph.D., Associate Extension Professor, Stephen Dicke, Ph.D., Extension Professor, and John E. Gunter, Ph.D., Professor Emeritus, pgs 3-4. http://www.timbertax.org/publications/extensionpubs/Overviewp2307.pdf.
For more information about timber taxation, see www.timbertax.org.