The IRS does not require that a formal bookkeeping system be maintained. However, it is recommended for accuracy and clarity if you had to reconstruct your timber activities. The accounts which are required in all circumstances in which a cost basis is established are land, merchantable timber volume, and merchantable timber value. The basic recommendations are:
Cash Accounting System - With this system the activities (transactions) associated with the operation are recorded when the cash is actually received or paid out.
Journal - This is a diary which contains a listing of the various business transactions. Each transaction entry should describe the transaction and give the accounts and dollar values involved...|example|
Ledger - All of the journal entries for each account are summarized in the ledger so that balances can be determined...|example|
Once established, your accounting system and tax year can only be changed with the permission of the IRS. If you do not keep records you must use the calendar year. If you keep records you may in some limited circumstances be authorized to use either the calendar year or a fiscal year. For additional information on accounting methods see IRS Publication 538, "Accounting Periods and Methods".
Assets that are placed in the land account include the land itself, non-depreciable land improvements, and depreciable land improvements. The amount entered for the land is the proportion of the total acquisition cost attributable to the bare land. This amount can not be depreciated and is recoverable when the land is disposed of. Non-depreciable land improvements include earthwork betterment's of a permanent character. Recovery of these assets is again when the land is disposed of. Depreciable land improvements include nonpermanent structures and improvements. Recovery of theses assets is by depreciation.
The amount placed in this account will depend on how the timberland was acquired. This amount is the original basis and will change as capital improvements are made to the asset, or as allowances for depletion, amortization, or depreciation are deducted. The amount remaining in any account after changes have been made is the adjusted basis.
Assets placed in the timber account can include merchantable timber, young growth or premerchantable (naturally seeded), and plantation or deferred reforestation (planted or artificially seeded trees of premerchantable size). Each of these accounts should include the volume of timber and its dollar value. Timber accounts can be further expanded to include separate cost bases for specific species, individual tracts, or location on your property. This may be advantageous if the timber quality and value varies across your property.
Merchantable timber - is that which can be marketed for utilization in accordance with the standards of utilization prevailing in the region at the time of the acquisition. The volume is usually stated in thousand board feet(MBF), or cords. Recovery of your basis in the merchantable timber is done through depletion if cut by the owner, or by allowable basis if disposed of on the stump.
Young growth timber - is that which is present on the property when purchased, but to small to be sold for pulpwood or other cut products. If the young growth contributes to the overall value of the property when it is acquired then a reasonable amount of the basis should be allocated to young growth. The volume is shown as the number of acres of young growth. When the young growth becomes merchantable, the basis in the account representing that particular stand is transferred to the merchantable timber account for recovery as described above.
Plantation or deferred reforestation account - is used to record the costs associated with the regeneration of timber by natural or artificial means such as planting or seeding. Aforestation and reforestation costs for timber production can never be deducted as an operating expense. Recovery of these costs is the same as the young growth, but you can deduct up to $10,000 of qualified expenditures with the remainder being amortized for 84 months rather than waiting to deduct them from sale proceeds when the timber is cut or otherwise disposed of.
Reforestation amortization account - is used to record any amounts that qualified for amortization from the plantation or deferred reforestation account. Up to $10,000 in qualified expenses can be deducted with the remainder being amortized for recovery over an 84 month period.
As the merchantable timber grows or as young growth becomes merchantable, adjustments to the merchantable timber volume account should be made. Merchantable timber growth does not adjust the value in the merchantable timber account. As young growth is transferred to the merchantable timber account, the merchantable timber value account should be adjusted accordingly.
Equipment and Building Accounts
Assets placed in this account should include depreciable equipment and machinery. A general rule is any item that costs more than $100.00, and has a useful life of more than one year should be capitalized. Individual subaccounts should be maintained for each item or class of items. The basis of any such items should be increased by any amounts spent for repairs that increase their value or prolong its useful life. Recovery of your basis in these items is done through depreciation. (See IRS Publication 534, Depreciation)
Click here for a summary table of these different types of accounts!