Sub-Section 142, Expenditures in the Timber Business
Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 142, Expenditures in the Timber Business
Last amended: 6-26-1978
Expenditures in the Timber Business
(1) Expenditures in connection with the acquisition of a timber property are to be capitalized. In addition to the purchase price, these expenditures include costs of timber cruises and appraisals made for purpose of the acquisition, boundary surveys, abstracts and title opinions, legal fees, and other fees and commissions directly connected with the acquisitions.
(2) Expenditures for the seeding or planting of timber trees (reforestation) are required to be capitalized and are recoverable through allowance for depletion when the new trees mature and are cut, or as adjusted basis if the timber is sold. Items to be capitalized include the cost of preparing the land for planting or seeding (site preparation), including the cost of clearing brush; removing or deadening unwanted trees; cost of seedlings, whether purchased or grown in the taxpayer's own nursery; and the cost of planting the seedlings, including cost of labor, transportation, supervision, equipment rental and depreciation on owned equipment. Expenditures for direct seeding are also capital in character and may not be expensed.
(3) Rev. Rul. 76-290, 1976-2 C.B. 188 provides an example of one kind of capital expenditure that taxpayers often claim as a currently deductible maintenance expense.
(4) Costs attributable to land and to permanent land improvements having an indeterminable life are nondepreciable and are recovered when the land is sold. Such items as permanent road grading, ditching, and fire breaks are ordinarily considered to be permanent land improvements.
(5) Expenditures in connection with road construction; such as for bridges, culverts, and surfacing are subject to depreciation. The allowance for depreciation may be based upon the useful life of the road or structure or may be computed by the unit of production method. In the unit of production method the unit rate is determined by dividing the total road cost by the quantity of timber available in the area served by the road. The allowable depreciation is the unit rate multiplied by the quantity of timber hauled over the road during the year. Maintenance costs are deductible as current expense.
(6) Expenditures directly connected with the sale or disposal of timber are treated as expenses of sale and are offset against the amount received in computing gain or loss. Costs of timber cruising, timber marking, scaling, advertising and other expenditures directly related to the sale are expenses of sale.