Capital Gains Determination
Timber held as part of a Trade or Business, sold under a Pay-as-Cut Contract
The holding period for a pay-as-cut contract runs from the date the timber or contract right to cut timber is acquired until it is considered to have been cut. The date of disposal is the date the timber is cut. Timber is considered to be "cut" at the time when in the ordinary course of business the quantity of timber felled is first definitely determined. Loggers in almost all regions of the country follow a more-or-less standard procedure. In the west, logs may pass through a roadside scaling station licensed by the state to scale logs and provide a scale ticket acceptable for all commercial transactions. More commonly logs are scaled or weighed at the mill purchasing them and/or at the log landing (where logs are stacked in the woods) by the logger or the hauler. IRS regulations specify that deviations from the standard practice to obtain a tax advantage are not acceptable.
If you held the timber for more than one year:
Timber held as part of a trade or business for more than one year and sold under a Pay-as-Cut contract would qualify for long-term capital gains treatment. The gain is reported in Part I of Form 4797, Sale of Business Property, along with any other Section 1231 transactions. The gains and losses from Section 1231 transactions are netted and then transferred to the appropriate business form. The gain can be determined by completing Form T, Part III.
If you held the timber for less than one year:
Timber held as part of a trade or business for less than one year and sold under a Pay-as-cut contract is treated as ordinary Income. The gain is reported on the appropriate business form.