The difference between depletion blocks and depletion accounts is often confused by forest landowners and Christmas tree growers.
As a quick reminder, basis is the measure of an individual’s investment in an asset, or the amount of money that has already been taxed in an asset. Depletion is a tax deduction based on basis when a forest landowner cuts or sells their timber.
A common question I receive is: do all trees get grouped together or can they be separated in different ways when calculating basis?
This question brings up a common issue of confusion between depletion blocks and depletion accounts.
Depletion Blocks
According to Treasury Regulation 1.611-3(d), a depletion block is generally based on geography and contains all of the taxpayer’s timber that would logically go to a single point of manufacture. A depletion block may also be an area that contains timber that would be removed by a single logging development. Blocks can also be established by geographic or political boundaries, or by logical management areas.
Depletion (Timber) Accounts
Each block is then generally divided into two or more timber accounts based on the character of the timber or its accessibility. Common timber accounts or subaccounts include merchantable timber, premerchantable timber, and plantations. The timber accounts may also be separated based on species or other characteristics.
If a forest landowner has multiple blocks of timber, they will have separate timber accounts and subaccounts for each block.
Utilizing Depletion Blocks and Timber Accounts to Maximize Tax Deductions
Forest Landowners
Forest landowners may have multiple blocks depending on the geography of their forestland holdings. If the forestland is all in the same general area, it will likely be kept in a single block. If a landowner owns multiple tracts in different areas, the landowner may need to keep the land in different blocks.
A forest landowner should consider separating their timber into separate accounts based on tree species or groups of tree species. This will result in greater tax savings if a landowner has some extremely valuable tree species and some not-so-valuable species because the landowner will receive a larger depletion deduction when the valuable species are harvested.
Christmas Tree Growers
Christmas tree growers will usually only have a single depletion block, as their farm is generally a single, contiguous tract of land. However, extremely large Christmas tree farms or growers with multiple farms or tracts may have multiple depletion blocks.
For choose-and-cut growers, I usually recommend a single account since it is often much easier recordkeeping because trees are sold that are planted in many different years, especially if a grower interplants.
Wholesale growers can more easily use multiple accounts based on other variables, such as age or species, as a wholesale growers normally cuts all trees in an area at the same time that are the same age or species.
Using a single depletion account, rather than multiple accounts based on age, may help save taxes (especially in a rising cost environment) because inflated expenses are added to the total pool of capitalized costs which are currently deducted, rather than waiting 8-10 years to recover them separately.
Conclusion
Forest landowners and Christmas tree growers should consider the best way to account for their depletion blocks and depletion accounts to maximize tax savings. Each landowner’s and grower’s situation is different, and consulting with a tax professional is recommend to maximize tax savings and avoid any IRS scrutiny.
Need help with forestland or Christmas tree farm bookkeeping? Contact me today to learn how I can completely take bookkeeping off your hands and help you save taxes!
