The value of a tree and how do you pay yourself?

[WV Sawmiller]

   I started to post this in the General Thread but felt it was more sawmill related so here it is.

  My wife and I have periodically had discussions about the value of the trees I cut off our property to saw into lumber or LE slabs to sell and how I figure and record their value. She seems to think they added value to the property and harvesting/removing them decreases the value of the property. Mostly I cut a few tulip poplar and a few Norway Spruce from an overaged Christmas tree endeavor. The spruce I mostly use for my composting toilets and such. When people ask about oak or hickory or walnut or such I tell them they are more valuable to me for the wildlife than lumber.

  My response to my wife is cutting the tree only decreases the value of land if I were going to sell it, which I have no plans to do and the new customer wanted the tree there. I guess if I were using the land/trees as collateral for a loan it might be an issue but again I am not planning on such. I point out if the new buyer is a farmer wanting to make a hay field and the tree is in the way it has negative value to him so it has different values for each "buyer".

  I also say the tree has no value till it is sold. Cutting, transporting, milling, storing and marketing the log into lumber incurs expenses but no income till it is sold. She is a free lance photographer and when I tell her to think of a picture she took, printed and is ready to sell but has not sold yet. She has money invested in it has no value and nothing coming out till it is sold.

   Another concern I mention is if I paid myself for the tree, I'd have to report that as both income to my "tree farm company" and as an expense to my sawmill business just as if I bought the logs from anyone else. I could open myself up to fraud charges based on what I showed as sale value, expense value and final sale price of the lumber from of the tree plus it is just extra paperwork I don't feel I need.

  For those of you who cut and saw your own trees into lumber do you have a process where you sell them to yourself or just show the expenses for cutting, milling and marketing then the income from  selling the finished lumber?


I cut his big poplar I today. I cut a smaller one a couple weeks ago and so far have mostly cut it into 2X4s for $1/bf and it has netted/returned over $300 and I still have one 12'+log with over 130 bf to saw.  I estimate 640 bf or so in the first 20' log before this tree forks into 2 forks that are 12-14 inches each. I figure I'll saw well over 1,000 bf once bucked to length.

Just over 31" at the butt where I sawed it. The first log will barely fit on my mill but I have high hopes for it.

[stavebuyer]

Growing stock like the yellow poplar in your pictures I would agree with your wife and cutting healthy growing stock is a capital depletion. Salvaging a borer killed Ash or a deformed Cherry might enhance the future value.

For accounting purposes large industrial owners can and do separate the "tree growing" and "sawmilling". Harvesting and processing costs are ordinary expenses as incurred, and stumpage is a capital value that is depleted. Detailed record keeping and reporting beyond what is practical for an individual is involved.

You are both correct. Cutting trees does impact the potential sales value of the tract of ground but showing that impact as an expense to yourself is not going to cut it with the IRS.



 

[Ron Wenrich]

Many years ago, I was told that timber was considered real estate, until cut.  Then it becomes personal property.  You would have to treat your timber more as a crop than as a value for aesthetics to the property.  If you consider it as a crop, then you would have a timber account for your sawmill business.  Its like having your log on the stump instead of being in your log yard. 

Your timber account would grow annually with the rising value in timber and increased growth.  When you take from you timber account to add to your sawmill account, you're just changing where the value is counted.  It doesn't become income until you sell the product.  Until that time, capital and labor are just investments.

Aesthetic values are a bit harder to monetize.  Putting a value on it depends on location.  A tree in your front yard has more aesthetic value than one in the woods.  I have put value on them for legal cases.  Those in the woodlot are generally valued for timber value.  Wildlife value and aesthetics are a lot harder to value, and would be more on the real estate value side of things.

[Cedarman]

I consider my trees as assets that can be converted to cash with equipment and effort or can be sold to a timber buyer if it would come to that.  The cash in your wallet has no value as it is just a piece of paper that you can use to trade for things you can use to enhance your life.
You are changing the tree into a product that people are willing to pay you for.  That money minus the expenses of making the product is what the IRS wants to tax you for.
When you cut the tree the asset disappears so the total value of your property has decreased by the value of the tree.  Hard to place a value on the tree until you sell all the product minus the expenses.

[WV Sawmiller]

   For me I have excess poplar I can harvest. We never appraised the timber value of this property when we moved here 32 years ago. We just made an offer for the house and land and the seller accepted and ever since it has mostly been sweat equity clearing out the multi-flora roses and creating/restoring useable pasture land for the livestock that we largely got to clear and maintain the land in the first place. For me cutting one poplar opens space for the 3-4 beside it to grow and their wildlife value is very low to me. I will continue to salvage any dying or fallen trees of other species such as ash or such but generally won't cut a healthy hardwood except of the poplar which I consider excess.

   Not much goes to waste as I can and do saw very small "logs" for use on my small building projects, save and use the firewood even though it is not high grade  and this time of year the horse and deer will be munching on the green leaves and tops.

[DaleK]

Trees only appreciate in value so long, then they depreciate fast. Trying to harvest them near the peak is tricky. It also depends how you're managing the woodlot and selecting the trees you cut, done right every tree you cut can increase the future value of the woodlot

[WV Sawmiller]

Dalek,

   You trigger several thoughts there. As discussed values change based on the perception and need. Paper mills want the close grown younger trees. Sawlogs typically need to be near mature. Wildlife den trees and such often need to be over mature trees with cavities and such. 

[longtime lurker]

I can't talk about the tax ramifications there with any certainty but generally speaking if land is managed for timber production then (a) the costs of management should be tax deductible and (b) the sale of logs will be income. If you're spending more on stand improvement then you'd be paying for the logs then it might well be worth looking at as a way of offsetting income from other business activities like farming or sawmilling.

Whether its worth the paperwork is another question but just as a matter of sound business practice you need to be placing a value on all logs sawed for commercial activity anyway, which means stumpage value + harvest cost + haulage costs, otherwise how do you place a value on your completed products? It's different if the lumber is for in-house/on farm use only but as soon as you start selling wood you have to account for the full cost of production otherwise you'd have been better off selling the tract to a logger.

Again, I have no familiarity with the US tax system but one thing I know about every government entity anywhere is they sure do like you to generate paperwork

[Ianab]

A single tree is tricky to value, but if you have 500 decent trees like that, what would a logger pay for them as stumpage if you just said "clear cut the whole lot"?

If that was say $25,000 then that individual tree is worth $50, as it stands.  Or $20, or $500 depending on the tree. 

Now if you ask a logger what one single tree is worth, it's nothing, because it usually costs more to  fell it than the single is worth.  But if you are harvesting your own trees, then the harvest cost will be different. 

So there is a value to a (good) standing tree. 
If you fall and buck it into logs, it should be worth more. 
Then haul it to the mill, +$
Saw it into boards- +$
Dry those boards - more $.   

Now how you assign those vales, especially for tax purposes is a whole other can of worms. But  like LL suggests, you might want to be able to deduct things likes land taxes, road maintenance and weed control  etc as a business expense in the overall operation. 

But that's above my pay grade. A good accountant is usually worth the $$ they charge. 

[Oddman]

Dalek,

  You trigger several thoughts there. As discussed values change based on the perception and need. Paper mills want the close grown younger trees. Sawlogs typically need to be near mature. Wildlife den trees and such often need to be over mature trees with cavities and such.

You mentioned the poplar you have down is going to be about maximum for your mill. Also you have a ready market for the lumber, the log appears to be in very good shape and as you said, should open more space for younger trees to thrive. Your "need" was well met by that particular poplar, just as the other mills have their needs/preference. Good choice in harvesting that one, I would say.
I run these "calculations" often through my mind as we have much timber land that i am trying to wrap my mind/equipment/capital/and time around in order to make the most and best use of it. Many decisions and many options. I spend a lot of time cruising timber and taking mental notes. I think knowing just what you have is very crucial. Also another useful bit is to have atleast a general idea of the local prices at the commercial mills, gives a baseline of value you can work from when pricing out. 

[WDH]

When you bought the property you should have had the timber cruised and determined how much of the value of the property was in timber and the volume of timber.  Then you create a depletion account that holds those $.  Periodically you have to adjust the volume for growth, that is the timber volume increases, but the $ stays the same.  When you harvest, you can deduct the depletion for that harvest but you can only deduct the depletion for the average $ and volume in the account.

Say you bought the property and there was $1000 in timber value and 5 MBF of timber.  Your average depletion at that time would be $200/MBF.  Now you let the timber grow for 10 years and do a partial harvest.  At the time of harvest, the timber had grown so now you have 10 MBF of timber.  Now the average depletion rate is $100/MBF, $1000 in the account divided by 10 MBF, and this is what you can deduct from the sale proceeds using IRS Form T on that years taxes.  Say you harvested 5 MBF out of the 10 MBF total.  That is a depletion expense of 5 MBF x $100/ MBF which is $500.  Now there are 5 MBF remaining in the account and the $ in the account are now the $500 that is left.  Next time you harvest, you determine the new total volume in the account and use the $500 in the account to calculate the new depletion rate.

So, you never set up a proper depletion account when you bought the property.  You did not establish a timber basis.  So technically you cannot deduct depletion expense when you harvest unless you go back in time and create the account at the time of purchase which will be difficult to do without a lot of guesswork.

So, since you are only harvesting a few trees here and there, and if you do not "sell" the timber to your self and deduct a depletion expense, no red flags get raised, no potential IRS audit happens, you pay a bit more in income taxes for the sale of the lumber, and it would be best to let sleeping dogs lie. 

[WV Sawmiller]

Danny,

  Sounds like a great and very logical system to account for the value of the timber at any given time but when we bought the place it was our primary residence and not for timber investment so no thought was given to any type of timber cruise or evaluation. As I mentioned before the timber is more valuable to us for recreation than lumber. At the time I did not own a sawmill or have any plans for making and selling any lumber. The only plan I had was to harvest a little firewood and maybe a few locust fence posts for use here on the place and most of them have been from dead or fallen trees.

   I am very diligent about keeping up with my sawmill expenses and income and the IRS and WV sales tax departments get their cuts so I have no fear from either of them.

   I appreciate the great comments from the others here. If nothing else it helps make me feel more comfortable in my current process and shows other options for others who may want to declare and manage their land for commercial timber options.

[SawyerTed]

NCSU extracts quarterly average stumpage prices in NC from the TimberMart South report. These stumpage prices are published on the NCSU website.  The TimberMart South Report is available by subscription as is the Hardwood Market Report.  

The TimberMart Reports provide both average stumpage and delivered log prices by species for each state and sometimes regions within a state. It also includes average pricing for wood chips, sawdust and shavings. 

The Hardwood Market Report gives wholesale pricing by region for sawn lumber products.  

If trying to determine market values, these reports along with a few strategic phone calls to commercial mills, will give you a good idea of market values for stumpage and logs your area.  Mix in a little mathematics and you can arrive at a well educated value by board foot and by log.

[WV Sawmiller]

Ted,

   Good information but remember the question/issue is how to value and how do you reimburse yourself for your own trees.

   I really have not been treating the trees I cut off our property any differently than those given to me by tree services or friends. I account for the expenses in getting them (In one case I paid a trucker to deliver a load of logs someone else had given me), sawing them and marketing them then I report the sales (for WV Sales tax accounting) and income for IRS and QV state income tax reporting. 

   I guess some states may require accounting the value of the trees on a person's property/residence for property tax purposes but WV does not. I'd hate to see the appraiser come checking the shade trees in and around my place to increase the value for property taxes but I guess it could be done. 

   I keep thinking, except for tree farms/designated timber land, the tree has no value till it is sold.

[SawyerTed]

Howard, I shared those resources as industry standard methods of arriving at the value of logs.  The value of saw timber (trees) is directly related to the value of the logs IF you are trying to reimburse yourself for the stumpage and delivered log prices for logs harvested from your own property.  

I believe the IRS or state revenue office, in questioning payments made to oneself, will want to see an industry standard method of arriving at the amounts paid.  

There is value in standing saw timber, otherwise timber deeds would not exist and would not be bought and sold.  If you are questioning how to pay yourself for trees harvested on your property, you are necessarily placing value on those trees.

In most cases, the value of the a tree is relative - if you don't have an interest in a logging operation, a sawmill or other wood products business, you may see trees from various perspectives.  A developer sees the trees as weeds (no value), the neighbor sees the beauty (aesthetic value), the conservationist sees habitat, the owner sees cash, the hunter a food source for his quarry, the environmentalist a hedge against climate change or a natural erosion control.  Besides the developer, the value is relative to those considering the trees. 

A small sawmill doing custom sawing sees value in trees/logs otherwise considered low value by by other wood products sectors. To some extent the value of the logs is determined by the value of the products of subsequent primary and secondary processing.  An example is white oak stave logs currently. 

In my case, for logs harvested from our farm, I pay one half the value of the stumpage to my BIL (the other half of the trees belong to my wife and I).  The value of the stumpage comes from the resources I mentioned in my previous post.  I pay our farm account the other half.  

[WV Sawmiller]

Ted,

   Thanks for the clarification. Good point about having an industry standard to show the IRS auditors. Since I am a one man band it is largely a moot point to me and it is worth whatever I can sell the lumber/slabs/benches/toilets/sheds/birdhouse/tomato stakes/firewood for after I sell them.

[fluidpowerpro]

Cost of goods sold, less expenses is profit. If you place no value on the tree, wouldn't you be paying taxes on an inflated number?

[WV Sawmiller]

Fluid,

   I'm not sure how to respond to that. I'm taking something for which I consider of no real value, spending time and money on it to convert it into something I can sell for cash money and reporting and paying taxes on the income.

   I guess it would be like a photographer taking a picture, printing and selling it or a painter painting and selling a painting. Lots of people take natural resources with no value and convert them into something useful or which will sell.

[Oddman]

Fluid,

  I'm not sure how to respond to that. I'm taking something for which I consider of no real value, spending time and money on it to convert it into something I can sell for cash money and reporting and paying taxes on the income.

  I guess it would be like a photographer taking a picture, printing and selling it or a painter painting and selling a painting. Lots of people take natural resources with no value and convert them into something useful or which will sell.

I'm confused by your statement that the tree has no value. It has value as stumpage, a logger could potentially buy   the timber standing and pay you money. You dont have to put anything into that as far as equipment/time like you do making value-added products. I personally try my best to account for the stumpage and my cost logging out our timber in the final price of my lumber. Otherwise your basically giving the tree away.
Timber is, to me, seen as un-realized income/gains. Like holding stocks, you decide when to sell/buy and when to hold. Find the stock (trees) that are at or near their peak and sell. If a tree has good growth potential then you want to hold out for more gains. They definitely have "value", atleast to my way of thinking.

[WV Sawmiller]

Oddman,

  That is true on a commercial tree farm or large plot of land but on small tracts like mine loggers will not touch them as they would cost more to harvest than they could sell them for. Because of my low tech process I can cut and process such trees but only on my own property. If I had to travel and transport even my undersized equipment and the log or lumber, it would cost more than I would make from it. I realized that the last time I sawed several high value cherry trees for a guy on shares. I said then I might saw on shares but only if the owner brought them to me as bucking and transporting my mill and trips back with my trailer and such to collect my lumber was cost prohibitive.

   Have you tried to sell a single tree on your place? See how that works out.

[fluidpowerpro]

My thoughts were strictly from an accounting / tax standpoint.
If you manufacture a product and your cost of raw materials is 0, then your profit is higher than if you had to pay for the material. Also your taxes will be higher. 
In a small operation, not a big deal. In a large operation, very big deal.

[Walnut Beast]

Have you tried to sell a single tree on your place? See how that works out.  
 
Many variables there. Depends on what it is and how big. If you cut it down or have somebody come get it.  You could have one veneer tree that could be thousands and it could work out really well!!. The value of a tree is not set in stone. There is a going price, what it's worth to you, what you could sell it for. Or one dead junk tree to one person would be firewood but another person  turning it into epoxy tables and making several thousand. From a value to land standpoint same thing. That's why Real estate agents of farms are marketing as hunting retreats because the trend of big value of wooded areas on farms are adding big time to the value of the land. To some people not all ! 

[WV Sawmiller]

WB,

  Remember I said sell a single tree. If I cut it down then I'm selling logs not a tree. I know a few people will buy high value logs like Walnut and such sometimes but the typical logger is not going to bring his equipment in and cut and move one tree especially if he has to build roads or clear access or such.

  I love your comment about marketing and we sometimes do it too. Birdseye maple, spalted maple, pithy cypress, wormy chestnut, denium pine, etc all used to be defects that either would not sell or sold for reduced prices because of the "defects." Heck, look at fashion trends. Ragged jeans and "pre-stressed" boots your mom would not dare let you wear in public are not all the rage.

Fluid,

  There are big operations that get free or cheap raw materials. I worked a project with Waste Management as our client where in several cities they were collecting a tipping fee for municipal garbage, incinerating it and generating electricity and selling the electricity and even made some profit off the recycle materials they could reuse/sell.

  The old adage "One man's trash is another man's treasure" is very true.

   They were taking waste products people were willing to pay to dispose of and creating a product people were willing to buy.

  What I was just pointing out is that many of us here on the forum use our own trees and our sweat equity and other farm or household equipment to harvest/salvage them (hopefully) for a profit and looking at how people reimburse themselves for the asset and the labor to convert it to a useable product they can sell.

  So far I have seen several options reported but most required an economy of scale far beyond what is economically feasible for me and many other readers here but it is interesting to read and something to keep in mind if the situation and conditions ever change to warrant it.

[fluidpowerpro]

Its a great topic and yes, an interesting read. It made me think about it from another angle.

[Oddman]

WV

I see your point considering a small woodlot. We have a pretty large piece here, the way I described is how I deal with the question but my situation warrants that. We have had pieces logged in the past, even very small pieces, but it helps having several small logging businesses in our extended family. 

And interestingly enough, we have sold a single tree before - my grandpa gave me the history on it, a guy came and bought a single black walnut, standing. He spend most of, if not a full day digging down around the stump before felling it in order to cut it very low. I asked grandpa how much they were paid for it, he didnt remember the amount but it was enough to pay the property taxes that year. 

And I have heard of black walnuts being sold individually, even right out of folks yards right in town. 

This entire subject has been on my mind very much lately. For background I'm in my 30's, large piece of "family land" you might say with the timber under my "say-so".  4x4 Tractors, smallish dozer, gooseneck dump trailer, decent sized manual mill. Land spread out over all kinds of terrain and multi-mile skids are possible to get to the mill. Lots and lots of on-farm projects for the lumber. Some outside sales but not chasing that. Timber is of varying ages/quality. My hope/plan is to acquire a small skidder and a hydraulic mill. If I stay with the manual mill I will not be able to scale the business to outside sales and still keep up with on-farm needs. Also the timber will outgrow me and I'll have to sell commercially. If I don't get a skidder i wont be able to harvest with enough efficiency due to distance and terrain and time required to skid with tractor/dozer combo. Also some timber has already outgrown my current skidding capacity.
I hope to stay with the timber crop in order to avoid commercial log sales as much as possible but also not expand too far to where I run out of timber. 

Anyways, that's my situation, maybe someone will find interest in that.