A question I frequently receive from forest landowners is: can I deduct the cost of forest roads on my tax return?
Generally, a forest landowner may deduct at least part of the cost of forest roads through depreciation. However, some of the cost may have to be capitalized and added to the value of the land, which is only recovered if the forest landowner sells or otherwise disposes of the property.
The short answer is: the deductibility depends on whether the road is permanent or temporary.
Permanent vs. Temporary
The distinction of permanent versus temporary often turns on whether the road will be used for a limited period of time or indefinitely into the future.
A permanent road is a road that is expected to be used indefinitely into the future, most likely for multiple uses, such as fire control, planting, and maintenance.
A temporary road is a road that is constructed for a specific use (such as logging a specific tract of timber) and then abandoned.
Even if a road is “permanent,” a forest landowner may still be able to deduct or depreciate the costs of resurfacing the road and other periodic maintenance costs.
Examples
For example, the costs of clearing, grubbing, and grading of a permanent road generally do not qualify for depreciation because they improve the land for an indefinite period of time. These costs must be capitalized and added to the value of the land, which can be recovered when the forest landowner sells or otherwise disposes of the land.
However, the costs of bridges, culverts, graveling, and paving of a road (permanent or temporary) are generally eligible for depreciation and may be deducted over a period of years. These improvements are “temporary” because they wear out over time.
Conclusion
The permanent versus temporary classification is often a very fact-specific determination. Consultation with a knowledgeable timber CPA is strongly recommended because every forest landowner’s situation is different.
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New to learning about timber taxes? Check out this series of posts on the basics!
