UNDERSTANDING TAX DEDUCTIONS FOR TIMBER LOSSES
 Michael Jacobson (University of Florida) and John Greene (USDA Forest Service)

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Introduction: Are You Eligible for a Deduction?

Landowners whose timber has been destroyed may be eligible to deduct the loss on their federal income tax returns.  There are two types of losses from natural events.  Casualty losses are sudden, unexpected, and unusual—as from a fire, storm, or earthquake.  Non-casualty losses are unexpected and unusual, but not sudden—as from an insect attack, drought, or disease.  Casualty and non-casualty loss deductions are available to all owners who hold timber to produce income, whether as a business or an investment.

The loss must be physical in nature and caused by an identifiable event or combination of events that has run its course.  A deduction is allowed only if the damage renders the timber unfit for use.  Normal levels of losses are a cost of doing business and cannot be deducted.

Calculating Your Deduction

Your loss deduction is limited to your adjusted basis in the timber destroyed, minus any reimbursement or other compensation received, which may not equal the timber's fair market value.  (Basis is the amount of capital invested in the timber producing activity; usually the stand establishment cost adjusted for any credits and deductions taken or additional investments made.  See Extension Publication SS-FOR-9, Income Taxes and Private Forest Landowners for information about establishing and adjusting your basis in timber accounts.)  The tax law permits landowners to recover their investment in lost timber, but does not act as insurance.

Timber destroyed traditionally is measured in units of volume, like cords or board feet.  Pre-merchantable timber (timber that is not yet old or large enough to be sold for products) is measured in terms of acres.  To determine your loss deduction, follow these three steps :
 1) Determine the volume of timber destroyed (the cost of determining the loss, e.g., payments to a consulting forester is deductible as an expense–do not add it to the loss);
 2) Calculate the depletion unit: Adjusted Basis / Timber Account Volume, updated to immediately before the loss;
 3) Multiply the depletion unit by the number of units destroyed.


EXAMPLE 1: You own 50 acres of forestland carrying 200 MBF (thousand board feet) of young sawtimber.  Your adjusted basis in the timber is $4,000.  Wildfire burns 10 acres, destroying 25 MBF of timber.  Your casualty loss deduction is: ($4,000 / 200 MBF) x 25 MBF = $500, even though the value of the timber destroyed was $6,500.

EXAMPLE 2: Extreme drought kills the seedlings on 15 acres of a 20-acre stand that you planted two years ago.  The stand establishment cost was $2,500, but you have amortized $536 of that amount on your last two tax returns.  Your non-casualty loss deduction is: ($1,964 / 20 acres) x 15 acres = $1,473

If the timber destroyed is salvageable, you are obligated to make a genuine effort to sell it.  If the proceeds from a sale or other reimbursement (insurance or other compensation) are more than your adjusted basis in the timber, you will have a taxable gain instead of a loss deduction.  But you can postpone recognition of the gain by using it to buy qualifying replacement property within three years (your tax professional may advise you to replace timber under a sale contract within two years).  Qualifying replacement property includes things like the cost of seeds or seedlings, site preparation, planting, restoration and repair, or the purchase of a replacement timber site.

Filing Your Deduction

Deduct a loss on your tax return for the year the loss occurs (you may be permitted to deduct a loss in a federally declared disaster area on your return for the previous year).  Reduce the loss by the amount of any reimbursement you receive or expect to receive.  You can report a higher-than-expected reimbursement as ordinary income in the year you receive it, but you must file an amended tax return if the reimbursement is lower than expected.

Use Form 4684, Section B, to report either a casualty or non-casualty loss.  For timber held as a business go on to Form 4797; for timber held as an investment go on to Form 1040, Schedule A.  Use of Form T helps establish that you hold timber as a business: report a loss on Schedule D and update your timber account volumes on Schedule F.  To postpone a taxable gain, file a plain sheet of paper with your tax return stating that you elect to postpone the gain, and describing the loss and the replacement property.  If you choose to recognize the gain report it on Form T, Schedule C, and Form 1040, Schedule D, just as you would for a timber sale.

This information is summarized from Agricultural Handbook 708, Forest Owners' Guide to the Federal Income Tax, USDA Forest Service.