Timber or logging operator taxes and deductions

Cut your own timber and sell the lumber and the whole profit is ordinary income. There are two ways out, and both convert part of it to a much better rate.

The first is an election to treat the cutting itself as a sale, at the timber's market value on the first day of the tax year, everything after that is ordinary business profit, and everything up to it is capital. It binds all your timber for that year and every year after, so it is not a decision to make lightly. The second is disposing of timber while retaining an economic interest, which gets the same treatment without the election. Either way the gain is section 1231 rather than automatic long-term capital gain. Depletion here is cost depletion only, never the percentage method that mining uses, computed as a unit rate against the volume you actually cut.

The deductions with a rule attached

These are the lines where the answer is not simply "keep the receipt"each has a cap, a percentage or a test that decides how much of the spend you actually get:

Equipment: Section 179 property. Deduct the whole cost in the year it goes into service rather than spreading it over the asset's life, up to $2,560,000 a year, and 100% bonus depreciation is now permanent. The catch is the business-use test: anything used more than 50% for the business qualifies, and you deduct at that percentage rather than the full price. So anything you also use at home comes off at the share that is genuinely work, not the whole invoice.

The rest of the timber or logging operator deduction list

Ordinary and necessary business expenses, deductible in full in the year you pay them, provided they are genuinely for the business:

Fuel
Staff wages
Liability insurance
Permits and licenses
Maintenance
Depletion
Travel to sites

Worth knowing

Standing timber can be taken at capital gain rates rather than as ordinary income, through one of two routes with different consequences.

That is what is specific to this trade. The larger deductions are the universal ones, see the full checklist.

What each deduction is worth to you

On $100,000 of profit with no state income tax, $1,000 deducted saves $305, 30.5%, because it comes off self-employment tax and income tax together:

Net profit	Saved per $1,000 deducted	Effective
$40,000	$231	23.1%
$100,000	$305	30.5%
$200,000	$297	29.7%

The last row is worth less than the one above it, and that is not a mistake: past the Social Security wage base the self-employment part of the saving drops from 15.3% to 2.9%, and the higher income-tax bracket does not quite make up the difference. A deduction is worth most in the middle.

Add a state income tax and every row rises. The 1099 calculator applies that layer.

Where this comes from

The rules on this page that are specific rather than general are cited below. Follow a link to read the provision itself rather than taking our word for it:

Two routes to capital treatment: electing to treat cutting as a sale, or disposal with a retained economic interestIRC 631(a), 631(b)
Timber uses cost depletion computed as a unit rate against volume cutIRC 611, 612; Reg. 1.611-3

What these words mean

Section 179: A rule letting you deduct the whole cost of equipment in the year you start using it, instead of spreading it over the years you own it.
Depreciation: Spreading the cost of something long-lasting, a vehicle, a camera, a tractor, across the years you use it, rather than deducting it all at once.

General information about how these deductions work, not tax advice. Whether a particular expense is deductible for you depends on facts this page does not have, check with a tax professional before claiming anything listed here.