FNR 81
forestry & natural resources
WOODLAND MANAGEMENT 
Tax Aspects of Walnut Management
by
William L. Hoover, Extension Forest Economics Specialist
The maximum biological potential of a walnut stand cannot be realized by limiting management activity to harvest cuts. Likewise, the maximum economic potential cannot be realized by ignoring tax matters until income is received from a harvest cut. The tax implications of every management decision should be recognized and taken into account when the decision is made.
What are the basic tax factors critical to obtaining an adequate rate of return on my investment in walnut?
1.	Expenditures should be made to maximize the proportion which can be deducted during the tax year in which they are made.
2.	Time the expenditures to maximize the overall tax savings available by using them to offset other income.
3.	Time the receipt of income to average out your overall income stream.
4.	Sell stumpage (standing timber) in a manner consistent with the capital gains criteria. Special rules apply if the timber is held by a taxpayer in the "timber business," or is sold in the form of logs.
Is everyone who invests money in the holding and management of timber in the "timber business?"
No, and in general your tax considerations are simplified if you are not. The question of whether or not an individual is in the "timber business" is judgemental. In general, however, you are not if you do not obtain a significant portion of your total income from your timber holdings.
But if you’re not in the "timber business" how can you deduct your timber related expenses?
The basic rule is that all ordinary and necessary expenses paid or incurred during the tax year in carrying on a trade or business may be deducted. In addition, an individual may deduct ordinary and necessary expenses for the production or collection of income or for the management, conservation or maintenance of property held for the production of income. Most individuals hold timber as an investment. As such they can deduct their qualifying expenses on the basis of the fact that it is property held for the production of income.
If you start a business you must show a profit during two of every five years. This is not possible for most timber holdings. How can the timber owner continue to take deductions over the long preproductive period?
As discussed in the previous question, most timber owners are not in the "timber business," but hold the timber as an investment. The profit rule does not apply.
How can timber investments be used to offset other income?
As discussed above, the ordinary and necessary expenses for the management, conservation or maintenance of property held for the production of income are deductible. The qualifying expenses are simply entered as an itemized deduction on your 1040. The deduction for a timber-related expense has the same effect as any other deduction.
PURDUE UNIVERSITY • COOPERATIVE EXTENSION SERVICE • WEST LAFAYETTE, INDIANA 47907