Step 1A: Read the section on Defining Your Operation (PDF, pages 176-177).
Step 1B:Refer to a tax advisor if necessary to determine whether you should report forestry-related income as an
How you report forestry income and expenses depends on a correct classification of your enterprise.
This chapter focuses on taxpayers as individuals managing timber as an investment or as sole proprietor of a business. If you are not managing your woodland with the intent to make a profit, much of this chapter may not apply to your situation.
Step 1C: Managing woodland as a business provides the most opportunities to deduct forestry-related costs in a timely manner. Taking the following steps will help prove to the IRS that you are managing your woodland as a business:
Step 2A: Read the section on Expenses, (PDF, pages 177 - 182).
Step 2B: Set up accounts (a record keeping system) to record different types of expenses:
Step 3A: Read the section on Timber Sale Income. (PDF, pages 182 – 184).
Step 3B: Before conducting your next timber sale, review this section to determine the income tax implications of different sale methods:
Different sale methods may affect how you determine the amount of income, whether income is a capital gain or ordinary gain, and how you report income.
Step 4A: Read the section on Other Timber-Related Income (PDF, page 184).
Step 4B: Report the sale of products derived from trees as ordinary gains or losses, e.g.,
Step 5A: Read the section on Form 1099, Information Return (PDF, page 184)
Step 5B: You are obligated to report timber sale and cost-share income to the IRS whether or not you receive a Form 1099 from the payer.
Step 6A: Report cost-share payments for timber stand improvement as ordinary income. Then deduct or capitalize the full cost of the practice as an operating expense.
Step 6B: If you received cost-share payments for reforestation, determine whether the IRS allows that payment to be excluded from income or not. Ask the agency that provided the cost-share payment whether it has been approved for the exclusion or ask the IRS.
Step 6C: Refer back to the section on Reforestation Amortization (PDF, page 180) to determine how to currently deduct or amortize tree planting expenses.
Step 7A: Did you have a casualty loss to timber. A casualty loss is a sudden, unexpected loss due to a natural or manmade causes such as a fire, windstorm, tornado, or hail.
Step 7B: Salvage as much timber as possible.
Step 7C: Make a claim with your insurance company if your timber was insured.
Step 7D: Determine your allowable basis in the timber destroyed to report a casualty loss. You will need an appraisal. A consulting forester can be hired to assess the loss.