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Sub-Section 131, General

Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 131, General
Last amended: 6-26-1978

General

(1) Each taxpayer is required to maintain such accounting records as will enable a correct return to be filed and have available such records and data as may be necessary to support the entries made. The taxpayer is allowed considerable latitude in choosing the methods of accounting that best suit the business needs. Certain procedures in connection with timber accounts, however, are prescribed by the regulations.

(2) It has been pointed out that the costs of land and permanent land improvements are not subject to depreciation or depletion. Records of these costs, together with subsequent allowable additions and reductions, must therefore be maintained separately. It is clearly stated in the regulations that the timber account may not include any part of the value or cost of the land. The land account may be a single "block" account or, as is often the case, the land may be kept in separate tract accounts.

(3) The timber record may be kept in one account or separate accounts may be kept by "blocks," by individual tract purchases, by species, by product (such as sawtimber, pulpwood, poles, etc.) or other classification, provided adequate and separate records are maintained. The total cost or other basis must be allocated to each different classification, in accordance with the relative values of each, and separate records of timber removals must be kept. The timber account may not include any part of the cost or value of the land, nor any amount recoverable through depreciation deductions or deductions other than depletion. Timber acquired under cutting contracts should be carried in separate accounts.

(4) Each timber account includes a record of the original quantity and cost, or other basis of the timber with necessary adjustments to basis and to quantity to reflect subsequent changes. Additions to quantity and to capital are made for timber acquired which is carried in the same account. Additions to timber quantity, but not to basis, are made as the small trees grow and reach merchantable size. Bear in mind that these accounts should include all merchantable timber. Adjustments of timber quantity is required when it is determined that the tract or the timber account actually includes more units of timber than is shown by the balance carried in the account. This may result from changes in standards of utilization or faulty estimates, as well as from growth.

(5) Deductions are made from timber quantity and the basis for depletion for timber cut, for timber sold, and for timber lost through fire, other casualty, or trespass-cutting.

(6) If these accounts are properly kept, the value remaining at the end of any year is the adjusted basis for depletion of the remaining quantity of timber. It is important, therefore, that these figures be accurately determined and properly adjusted when necessary.

(7) The estimate of quantity must be made as accurately as possible. The quantity reported should be the number of units of timber (expressed in terms of thousands of board feet log scale of sawtimber, cords of pulpwood, number of poles, etc.) that would be found by careful estimate. The estimate should be made with the objective of determining 100 percent of the quantity of timber that the area would produce if all the merchantable timber were cut and utilized in accordance with the prevailing standards of utilization.

(8) It is important that the log rule used be known because different log rules give different results. The same log rule used in making the timber estimate should be used in scaling the timber cut. The units of measure used must also be consistent. It is possible, by the use of converting factors, to accomplish a reasonable conversion from one log rule to another or from one unit to another, but such factors must be checked against local conditions.

(9) If immature timber or young growth is a factor in the value of timberland, a part of the total cost of acquisition should be allocated to it based upon its relative value at the time of the acquisition. This amount is, in effect, the basis of the immature timber and is recoverable through depletion allowances when the timber becomes merchantable. A separate account is maintained for the immature timber. Estimates of timber quantity and allocated basis attributable to that quantity are transferred to the proper merchantable timber account when the timber becomes merchantable. Schedule F in Form T (Timber), Forest Industries Schedules, illustrates the proper manner of maintaining each timber account.