You can figure timber depletion only by the cost method. Percentage
depletion does not apply to timber. Base your depletion on your cost
or other basis in the timber. Your cost does not include the cost of
Depletion takes place when you cut standing timber. You can figure
your depletion deduction when the quantity of cut timber is first
accurately measured in the process of exploitation.
Figuring cost depletion.
To figure your cost depletion allowance, you multiply the number of
timber units cut by your depletion unit.
When you acquire timber property, you must make an estimate of the
quantity of marketable timber that exists on the property. You measure
the timber using board feet, log scale, cords, or other units. If you
later determine that you have more or less units of timber, you must
adjust the original estimate.
The term timber property means your economic interest in
standing timber in each tract or block representing a separate timber
You figure your depletion unit each year by taking the following
- Determine your cost or adjusted basis of the timber on hand
at the beginning of the year.
- Add to the amount determined in (1) the cost of any units
acquired during the year and any additions to capital.
- Figure the number of units to take into account by adding
the number of units acquired during the year to the number of units on
hand in the account at the beginning of the year and then adding (or
subtracting) any correction to the estimate of the number of units
remaining in the account.
- Divide the result of (2) by the result of (3). This is your
You bought a timber tract for $160,000 and the land was worth as
much as the timber. Your basis for the timber is $80,000. Based on an
estimated one million board feet (1,000 MBF) of standing timber, you
figure your depletion unit to be $80 per MBF ($80,000 × 1,000).
If you cut 500 MBF of timber, your depletion allowance would be
$40,000 (500 MBF × $80).
When to claim depletion.
Claim your depletion allowance as a deduction in the year of sale
or other disposition of the products cut from the timber, unless you
choose to treat the cutting of timber as a sale or exchange. Include
allowable depletion for timber products not sold during the tax year
the timber is cut as a cost item in the closing inventory of timber
products for the year. The inventory is your basis for determining
gain or loss in the tax year you sell the timber products.
Assume the same facts as in the previous example except that you
sold only half of the timber products in the cutting year. You would
deduct $20,000 of the $40,000 depletion that year. You would add the
remaining $20,000 depletion to your closing inventory of timber
Choosing to treat the cutting of timber as a sale or
You can choose, under certain circumstances, to treat the cutting
of timber held for more than 1 year as a sale or exchange. You must
make the choice on your income tax return for the tax year to which it
applies. If you make this choice, subtract the adjusted basis for
depletion from the fair market value of the timber on the first day of
the tax year in which you cut it to figure the gain or loss on the
cutting. You generally report the gain as long-term capital gain. The
fair market value then becomes your basis for figuring your ordinary
gain or loss on the sale or other disposition of the products cut from
the timber. For more information, see Timber in chapter 2
of Publication 544,
Sales and Other Dispositions of Assets.
Attach Form T, Forest Activities Schedules, to your
income tax return if you are claiming a deduction for timber depletion
or choosing to treat the cutting of timber as a sale or exchange.
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