Author: Yanshu Li

Hurricane Helene struck six southern states, from Florida to Virginia, in late September 2024. It made landfall in Florida’s Big Bend region as a Category 4 hurricane, weakened to a Category 2 across Georgia, and became a tropical storm as it moved through South Carolina, North Carolina, Tennessee, and Virginia. Over 250 counties have been declared federal disaster areas eligible for individual and/or public assistance (see Figure 1). Many timber owners in and near these areas have suffered significant timber losses. The hurricane caused around $1.86 billion in timber losses across 1.5 million acres, including some of the Southeast’s most productive timberland. While full recovery will take years, timber owners can take some immediate steps to mitigate losses, such as claiming timber casualty losses on federal income tax returns and conducting salvage timber sales.

There are a few key points for deducting timber casualty losses resulting from a federally declared disaster like Hurricane Helene and deferring taxes on salvage timber sales:

• Timber casualty loss deduction. You may be able to claim a deduction for timber casualty losses on your federal income tax return. 
• Choice of tax year to claim the loss. If your damaged or destroyed timber was in a federally declared disaster area (see Figure 1), you can choose to claim the casualty loss on either your 2023 or 2024 tax return. 
• Method for determining loss. Timber casualty losses should generally be determined using the timber depletion block approach, rather than simply adding up the value of the damaged or destroyed timber. 
• Deduction limit. The deductible amount for timber casualty losses cannot exceed the adjusted basis of the affected timber depletion block. This amount is often lower than the retail value of the affected timber block.
• Salvage timber sales. Claiming a casualty loss deduction and conducting a salvage timber sale are separate events. You do not have to wait until you complete a savage sale to claim your timber casualty loss. 
• Tax deferral on gains from salvage sales. You can defer taxes on profits from salvage timber sales if you use the proceeds to purchase qualifying replacement property.

For more information, please refer to this publication.  Although the publication focuses on Georgia timber owners affected by Hurricane Helene, the general principles apply to timber losses caused by other casualty events, such as fires, floods, hurricanes, and storms. Please visit FEMA for the list of federally declared disasters related to Hurricane Helene in Florida (DR-4828-FL), North Carolina (DR-4827-NC), South Carolina (DR-4829-SC), Tennessee (DR-4832-TN), and Virginia (DR-4831-VA).  Be sure to consult your accountant and/or tax specialists.

Figure 1. Designated areas due to Hurricane Helene

Timber Stand Damage 

Following recent droughts, hurricanes, or other natural disasters, many timber owners may wonder if they can deduct timber losses on their federal income tax returns. As with many tax questions, the answer is often, “It depends.” While it sounds unhelpful, it reflects the complexity of factors that can influence the eligibility for the tax deduction. Furthermore, even if the timber losses are deductible, they may be subject to different deduction rules regarding types of losses, ways to calculate the deduction, and limitations on the deductible losses. These also have implications for the forms used to claim the deductions and documents for record keeping. 

This article focuses on the tax treatment of timber losses from natural disasters for federal income tax purposes. The rules for income tax deductions for yard trees differ from those for timber. We’ll cover that topic in a future article. As mentioned in a previous article in this series, the classification of your timber holding has important tax implications. Timber holding can generally be classified as one of the following three types: 1) for personal use or as a hobby (not-for-profit); 2) as an investment; or 3) for trade or use in a trade or business.

Natural disasters and types of timber losses

Not all natural disasters are treated the same when it comes to timber loss deductions on your federal income tax returns. Timber losses from natural disasters could be treated as casualty losses or noncasualty losses. 

• Casualty timber loss. If the timber loss is caused by natural disasters such as fire, storm, flood, hurricane, volcanic eruption, or earthquake, it could be treated as a casualty loss. For federal income tax purposes, a casualty is an identifiable event that is sudden, unexpected, and unusual. Suddenness is a key element, and it means the suddenness of the loss rather than the suddenness of the event itself (Rev. Rul. 87-59). Therefore, timber losses due to gradual deterioration are not considered casualty losses. For example, losses of timber following prolonged droughts (Rev. Rul. 90-61) or epidemic attacks of Southern Pine Beetles (SPB) are generally not considered casualty losses
• Noncasualty timber losses. Noncasualty timber loss is the loss of timber due to an identifiable event that is unexpected and unusual but does not meet the suddenness requirement. The loss may result from a combination of factors. For example, timber losses from prolonged droughts or epidemic attacks of beetles (e.g., mountain pine beetles, SPB) could qualify as noncasualty losses for landowners holding timber in a trade or business or as an investment. 

However, tree mortality caused by routine disease and normal levels of insect infestation is considered a cost of doing business and is not treated as either a casualty loss or a noncasualty loss. These losses are recoverable through depletion when the timber is sold or harvested.

Tax treatment of casualty timber losses vs. noncasualty timber losses 

There are several tax advantages to timber casualty losses compared to noncasualty losses: 

• Deduction from ordinary income. Timber casualty losses are deducted from ordinary income, while timber noncasualty losses offset section 1231 gains first, which are taxed at the lower long-term capital gains rate. 
• Eligibility. Casualty loss deduction is available for all types of timber holdings, including timber for personal use (subject to the $100 reduction and 10% adjusted gross income rule and presidentially declared disaster area). In contrast, noncasualty loss deduction is only available for timber held in a trade or business or as an investment. 
• Loss estimation method. Timber casualty losses are estimated using a block approach (IRS, 2011). Deductible timber casualty loss is the lesser of (1) the adjusted timber basis or 2) the diminution in the fair market value of the timber block due to the casualty. In contrast, timber noncausality losses are estimated like a timber sale by multiplying the depletion unit by the quantity of timber destroyed. When the timber depletion block is large, and only a relatively smaller portion of it is damaged or destroyed, the deductible timber casualty loss could be greater than if the loss were considered noncasualty. 
• Special provisions for federally declared disaster areas. If the timber casualty loss results from a presidentially declared disaster, you can deduct the casualty loss in the current year or on an amended return for the previous year. 

Landowners may experience significant timber losses due to various natural disasters. Federal income tax provisions are available to help landowners recoup some of the losses. However, the tax treatment of timber losses varies depending on the type of natural disaster and the classification of the timber holding. In most cases, the deductible timber losses may not fully reflect the actual economic losses. Affected landowners are encouraged to consult with a forester and tax advisor for advice specific to their situation. 

References

IRS. 2011. Timber casualty loss audit techniques guide. 

Resources:

Li, Y. 2019. Income tax deductions for hurricane-damaged timber losses. University of Georgia.

National timber tax website: www.timbertax.org.

Tanger, S., Dicke, S., and Henderson, J. 2021. Frequently asked questions about timber casualty losses. Mississippi State University. 

Wang, L. 2018. Income tax deduction on timber and landscape tree loss from casualty. USDA Forest Service. 

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Li, Yanshu. “Can I deduct timber loss from natural disasters?” Southern Ag Today 4(34.3). August 21, 2024. Permalink

It’s that time of year again! Let’s hope you won’t be like Homer Simpson, scrambling to put numbers on the federal income tax return, rushing to the post office, and tossing the envelope in the mail bin at the last minute on Tax Day. While many of us only think about taxes during tax season, for private forest landowners, every forest management decision could have tax implications. Understanding the tax consequences, taking advantage of the preferential tax provisions, and integrating tax planning into forest management decisions are crucial.  

Forest landowners may generate income not only from timber but also from various nontimber forest products. Timber income generally qualifies for the preferential capital gains tax treatment if the holding period requirement is met. However, is income from nontimber forest products treated similarly to timber income for federal income tax purposes? This is the topic of today’s article. 

If you are interested in timber taxes, please refer to the timber tax tips for 2023: https://www.timbertax.org/publications/fs/taxtips/TaxTip2023.pdf.

Defining nontimber forest products for tax purposes

Nontimber forest products generally refer to goods harvested or derived from forests for purposes other than timber. They may include tops, limbs, twigs, branches, roots, tubers, bulbs, leaves, bark, fruits, nuts, tree sap, mushrooms, and other fungi, and in some instances, entire plants. 

Note that the IRS definition of timber differs from the term used by a forester. For tax purposes, timber generally means standing trees suitable for commercial production of wood products. Under certain tax provisions (e.g., gain or loss from the disposition of timber under Section 631), timber also includes Christmas trees (i.e., evergreen trees aged six years or older when severed from roots and sold for ornamental purposes). Therefore, nontimber forest products, for tax purposes, have a broader scope than their definition in forestry. 

Character of income from nontimber forest products

Not all types of income are treated equally for tax purposes. The character of income may determine whether it’s subject to certain taxes (e.g., self-employment tax, net investment income tax), which loss deduction rules to follow, the allowable amount of certain deductions, and the applicable tax rate. 

With a few exceptions, net profits from the sale of most nontimber forest products generally are taxable as ordinary income. If the income is derived from your material participation in a trade or business (including a farming business), it is subject to self-employment tax. 

Sales of the following nontimber forest products normally generate ordinary income:

• Logging residues left behind after a timber harvest and sold separately from the original timber sale. Products such as pulpwood from tops and limbs, wood mulch, wood chips, and firewood may be made from these logging residues. While income from the original timber harvest might qualify as capital gains, income from the sale of these byproducts is ordinary income. The sale of tree stumps is normally considered ordinary income (see below for an exception). 
• Christmas trees harvested before reaching six years of age.
• Products collected from trees, such as pine straw, maple sap, walnut sap, evergreen boughs, pinecones, fruits, and nuts.
• Living trees, such as seedlings, balled-and-burlapped trees, living ornamental trees, and living fruit or nut trees. 
• Products from annual plants and mushrooms in forests, including mosses, lichens, vines, herbs, wildflowers, ramps, beargrass, and mushrooms. 
• Products derived from some perennial plants but not the final harvest. For example, some ginseng growers sell the leaves and stems of the plants annually before harvesting the roots. 

On the other hand, long-term capital gains could be generated in these cases:

• The sale of tree stumps from cutover land purchased years ago as an investment by a taxpayer not in the timber or tree stump business. 
• The final harvest sale of cultivated perennial plants. Examples include American ginseng, black cohosh, and goldenseal. Income from the sale of these products’ roots can qualify as capital gains.

Reporting expenses and income from nontimber forest products

Depending on the extent of your involvement in the production of nontimber forest products, your nontimber activities  may qualify as a trade or business. Especially, forest farming operations is inherently a business because it is the intentional and intensive management of forested lands to produce nontimber products and is . 

Ordinary and necessary expenses related to the gathering, growing, processing, or marketing of nontimber forest products are deductible. Nontimber forest products producers who qualify as material participants in a trade or business should report the deductible expenses on Form 1040, Schedule C or F, as appropriate. Expenses incurred to establish forest perennials are capital expenses. They can be recorded in a capital account and deducted from the gross proceeds when the plants are harvested and sold. Material participants in a trade or business should report ordinary income from nontimber forest products on Schedule C or F (Form 1040), as appropriate, and report capital gains on Form 4797.

Forest owners classified as investors should report ordinary income from nontimber forest products as “Other income” on Form 1040, Schedule 1, and report capital gains on Form 8949 and Schedule D (Form 1040).  Prior to 2018, investors report deductible expenses as miscellaneous itemized deductions on IRS Form 1040, Schedule A, where they will be subject to the 2 percent of adjusted gross income floor. However, the miscellaneous itemized deductions are suspended for 2018-2025 because of the 2017 Tax Cuts and Jobs Act.

Conclusions

Many private forest landowners generate income from nontimber forest products. While the income serves as a supplement to timber income for some forest landowners, for others, it may be their primary source of income. With a few exceptions, most of the income from nontimber forest products is taxable as ordinary income for federal income tax purposes. Ordinary and necessary expenses associated with the production of nontimber forest products are deductible. It is critical to keep records of these expenses to support your profit motive and substantiate your deductions. 

This article is for informational purposes only and is not intended to provide financial, tax, or legal advice. Please consult your own tax advisor concerning your particular tax situation.

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Li, Yanshu. “Tax Considerations of Income and Expenses from Nontimber Forest Products.” Southern Ag Today 4(14.3). April 3, 2024. Permalink

The South-wide average pine sawtimber stumpage price has held steady during the third quarter of 2023, showing no significant fluctuations when compared to the levels observed in the previous four quarters. Pine sawtimber prices in the region averaged $25.98/ton. ranging from approximately $20/ton in Virginia to $32/ton in Florida (TimberMart-South, 2023). The figure was roughly $2/ton lower than the recent high in early 2022 but remained $2/ton above the pre-pandemic level. South-wide average hardwood sawtimber price rebounded slightly to $32.39/ton after three consecutive quarters of decline. 

The recent decline in pine sawtimber prices can be attributed primarily to the softened demand for lumber. Pine sawtimber prices had a rally from mid-2020 to early 2022, primarily driven by robust demand for lumber. However, factors such as rising interest and mortgage rates, deteriorated housing affordability, and worries of an economic slowdown have cooled the general housing market since then. Single-family housing starts —a major driver for lumber and structural panel products— in September were at a seasonally adjusted annual rate of 963,000 units, falling below the long-term average of 1.1 million units.  

The South-wide average stumpage prices for both pine pulpwood and hardwood pulpwood fell sharply over the past four quarters. Pine pulpwood stumpage prices averaged $7.59/ton in the third quarter of 2023. This represented a significant 21% year-over-year decline and a substantial 31% drop from the recent high recorded in early 2022. The decrease in wood fiber prices can be attributed to several factors, including the product shift in the paper sector, a rise in the utilization of recycled fiber, and a surge in the supply of mill residues resulting from recent expansions in lumber mills. The decline was even more pronounced in certain timber regions (e.g., South Carolina and Western North Carolina) due to the recent closure of paper mills. 

The average delivered prices for sawtimber and pulpwood products fared relatively better than their stumpages prices, with only slight year-over-year declines in the range of 2% to 5%. Notably, the gap between delivered and stumpage prices for all timber products has significantly widened since 2020. The widening gap can be attributed to multiple factors, including inflation in fuel and material prices. Furthermore, the persistent decline in the logging crew of the region has played a significant role in the margin increase. Employment in the logging industry dropped 34% from 38,200 in 2000 to 25,300 in 2022 (U.S. Census Bureau, 2023). While improvements in productivity have helped mitigate some of the losses, this ongoing downward trend has left a lasting impact on the industry and the delivered prices.

Looking forward, pine sawtimber prices in the South are expected to continue its slow recovery from the 2008-2009 recession, driven by the anticipated growth in single-family housing starts and the expanding lumber production in the region. The historical low in existing housing inventory, coupled with homeowners maintaining their properties with low-rate financing, highlights the pressing need for the expansion of the new housing market in the foreseeable future. 

Softwood lumber production capacity in the South has increased 25% since 2017 and reached 26.9 billion board feet (bbf) in 2022 (Forisk, 2022a). Announced greenfield construction and existing mill expansion suggest that the capacity could reach 28.5 bbf by 2025 (TimberMart-South, 2023; Forisk, 2022b). However, the 10-year accumulation of underbuilding and the resulting oversupply of sawtimber will likely continue to put downward pressure on pine sawtimber prices. Pine pulpwood prices are likely to remain flat or trend lower as lumber production increases and the structure change in the paper sector continues. 

It is important to note that timber markets are largely local. Timber prices for a specific timber stand are influenced by various factors, including the timber species, quality and size of the trees, site accessibility, local timber inventory, mill types and capacities, logging capabilities, transportation capacity, and many other local considerations. 

References

Forisk. 2022a. Forisk North American forest industry capacity database.

Forisk. 2022b. Forisk Research Quarterly: Fourth Quarter 2022.

TimberMart-South. 2023. Market news quarterly. 

U.S. Census Bureau. 2023. QWI Explorer. 

Southern timber prices in the first quarter of 2023 fell year-over-year for all product types. According to TimberMart-South, average prices dropped 7% to $25.87/ton for pine sawtimber, 15% to $9.39/ton for pine pulpwood, 5% to $31.95/ton for hardwood sawtimber, and 25% to $9.07/ton for hardwood pulpwood. However, the pine sawtimber prices are still above the pre-pandemic level. 

The weakened timber prices are mainly caused by reduced demand for lumber. Higher mortgage rates, deteriorated housing affordability, and worries of an economic slowdown have cooled the general housing market and resulted in reduced housing starts (major driver of lumber and structural panel products). Lumber prices skyrocketed during the pandemic but have receded sharply since mid-2022 and have been stabilizing at the long-term average level. 

Although we use south-wide average prices, it is hard to say we have an integrated timber market in the U.S. South. It is actually made up of multiple local timber markets and the timber prices are largely determined by local timber inventory, mill types and capacities, logging capacity, site accessibility, transportation conditions, etc. Therefore, some local timber markets may fare relatively better than others. For example, the average pine sawtimber prices in southeast Georgia, north Florida, and east Alabama are generally higher than the average prices in the West Gulf regions.   

Considering the oversupply of sawtimber in the region, whether the decrease in timber prices will continue or not largely depends on factors from the demand side. Softwood lumber production capacity in the South has increased 20% in the past 5 years and reached 26.9 billion board feet (bbf) in 2022 (Forisk, 2022a). Announced greenfield construction and existing mill expansion suggest that the capacity could increase by another 5.1 bbf by 2025 (Forisk, 2022b). However, economic outlook (especially the housing market) adds uncertainties to the market. 

References

Forisk. 2022a. Forisk North American forest industry capacity database.

Forisk. 2022b. Forisk Research Quarterly: Fourth Quarter 2022.

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Li, Yanshu. “Southern Timber Prices Weakened.” Southern Ag Today 3(27.3). July 5, 2023. Permalink