Although you have just learned about the four basic types of capital accounts, we will explore them in more detail here and discuss some options for managing these accounts.
Financial records are necessary to track investments, disbursements, and other types of financial transactions. These records track capital expenses (money spent) and the associated assets. For instance, the owner might create a special capital account for a work truck to record its original cost, and expenses to operate, repair, and maintain it. When the owner sells or disposes of the truck, he or she can use the value in the capital account to offset its resale value and tax liability. All forest landowners should create and maintain four different types of capital accounts: land, depreciable real property improvement, timber, and equipment.
Land AccountThe land account includes all nondepreciable assets that have an “indeterminate useful life and a permanent character.” Divide amounts in the land account between the value invested in the bare land and the value invested in permanent improvements. Permanent improvements might include nondepreciable earthwork for roads, land leveling, and dams. The key land account concept is that the assets do not depreciate over time. The assets are not worn out while being used to produce income.
Equipment AccountsEquipment accounts include the costs of depreciable equipment and machinery used in the production of income. Taxpayers can include costs of major repairs and overhauls that increase the value or extend the useful life of equipment already owned. Equipment typically recorded in this account includes chainsaws, tractors, spray equipment, planting tools, and vehicles used in the production of in-come. Keep separate financial summaries for each item acquired.
Timber AccountsTimber accounts are important records for the forest land investor. Value is the primary figure recorded in all capital accounts. The timber accounts also include the volume of timber under consideration or the acres occupied, whichever is applicable. Forest landowners can divide forest parcels into management units. These units track stands of timber similar in age that require similar management techniques. By keeping management activities separate for each unit, the forest landowner can keep separate timber accounts to track specific financial investments. Separate timber subaccounts will follow timber at different levels of development that have different levels of money invested in them. Each landowner decides how many subaccounts are appropriate for his or her situation.
The forest landowner begins by recording the value invested (its original basis) in the timber within each timber subaccount. This value reflects the value only of the timber, not the value of the land, buildings, or equipment. Record the volume of the trees at acquisition in standard measurement units common to the region where the timber is located. This might be cords, tons, or MBF, depending on what the trees are being grown to produce. Use the volume of timber that could be cut and sold according to the region’s prevailing utilization standards at the time of acquisition.Merchantable Timber
Premerchantable natural growth accounts track stands of young timber that occupy sufficient area to contribute to the total value of the forest land investment. Established stands of young trees add value to the overall investment compared with bare land having no trees growing on it.Premerchantable Natural Growth
If the forest landowner purchases land with young trees, the investment is the dollar amount attributable to the young timber growth beyond the value of the bare land. Owners are allowed to estimate this value based on either the cost or income approach. Keep separate subaccounts for each unit of premerchantable timber.
Premerchantable natural reforestation includes trees regenerated through a number of silvicultural techniques. The particular definition of this forest land category is that the young trees (seedlings) have been regenerated from seed donated by surrounding trees (i.e., not planted).Premerchantable Natural Reforestation
Record the amount invested in these subaccounts as acres until the trees reach merchantable size. Once the trees are considered merchantable by local standards, transfer them to a merchantable account recording volume.
This account commonly is called the reforestation subaccount, but is also called a plantation or deferred reforestation subaccount. Record all money spent to “establish” new seedlings¾site preparation; seed; seedlings; stump removal; the control of brush, weeds, and rodents; preventing or limiting deer and elk browse or their damage; and associated expenses. Taxpayers also can record the costs of seedling transportation and hired labor. Do not list costs of taxpayer labor in this account. Taxpayer labor is part of the investment to be “paid” when selling or disposing of the asset.Reforestation by Planting or Seeding
Note the distinction between establishment costs and deductible (noncapital) silvicultural expenses. Establishment costs only include those expenses associated with establishing the stand. Noncommercial thinnings are maintenance costs, deductible as ordinary and necessary trade or business expenses.
Depreciable Real Property Improvements AccountThe depreciable improvements account records real assets worn out in the production of income. Assets that typically fit into this expense category include buildings, temporary roads, culverts, and fences.
After The Fact Adjustments
Establish each of the four types of accounts at the time you acquire assets, when all information is more easily available. The costs of setting up the accounts can outweigh future tax savings. You can determine the account values in the future (i.e., after the fact) by checking old records, measuring current volume and growth to estimate volume at acquisition, checking value records, and other methods.
Understanding capital expenditures is the
key to taking full advantage of state and federal tax laws. Capital expenditures
include money spent to acquire real estate or equipment with a useful life
greater than one year, or to make improvements that increase the value
of real estate or equipment already owned. Examples include: land, buildings,
standing timber, reforestation costs, and equipment.
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