Taxes for Working Forests and Tree Farms

Rick Hamilton, NC RFExtension Forester, Retired

Income Tax Implications1.Timber Sales and Basis2.Cost-Share Payments3.Reforestation Tax Incentive4.Estate highlights

Timber SalesGross Income

$50000Costs of Sale

(8500)Basis (21500)Net Taxable Income

$20000

Timber Sale (cont.) Net Taxable Income

$20000

Long-Term Capital Gains (LTCG)1 Year Holding PeriodFor Both Investors and

BusinessesReport on Schedule D

(Investors)Report on 4797 (Business)

LTCG RatesIncome* Ordinary Rate

LTCG**$0-16,050 10% 0%$16,051-65,100 15% 0%$65,100-131,450 25% 15%$131,451-200,300 28% 15%$200,301-357,700 33% 15%$357,701+++ 35% 15%

*Married Filing Jointly, **2008-2012

COST OF SALETree markingScalingCruisingTemporary roadsConsultant feesLegal feesAdvertising feesSurveyEtc….

Timber BasisWhy is it important?

• Basis reduces timber sale proceeds• Basis or FMV (whichever less)=loss• Only the net amount is taxable

(Tax Code §1001(a))

An Example• Joe inherited a timber tract in

Louisburg 2 years ago.

What is his timber basis?

Answer to the Example• Timber quantity and price 2 years

ago in Joe’s land:– Pine sawtimber 100 tons x $30/ton = $3,000– Pine pulpwood 200 tons x $6/ton = $1,200– Hardwood pulpwood 300 tons x $4/ton = $1,200

$5,400

Land with Pre-Merchantable Timber

• The FMV of timber generally means $/acre

Special Tips for Timber Basis

• Timber basis has two parts: timber quantity and $ value

(Tax Regulation §1.611-3)

Special Tips for Timber Basis

• Basis must be allocated between land and timber

(Tax Regulation §1.611-3)

Timber Basis• For purchased property, timber basis is the

purchase price plus acquisition costs

Timber Basis• For gifted property, if no gift tax is paid,

the basis is: (a) donor’s adjusted basis (gain at disposal) (b) the lower of the donor’s adjusted basis or the

FMV (loss at disposal) (§1015 and §1.1015)

ADJUSTED BASISOriginal plus:

Capitalized ExpensesCarrying chargesCapital improvement investment

OR

Original Minus:DepletionCasualty loss deductionBusiness loss deduction

BACK CRUISEUse to establish a basis

Allocates timber value at time of acquisition

4 step process1. Determine present volume2. Estimate growth over period since acquisition3. Reduce present volume by growth 4. Volume past X stumpage past = Basis

Note: Limited by purchase price or by FMV accepted by IRS

ESTIMATED TAX FROM TIMBER SALESEstimated taxes should be paid on

income resulting from a timber sale.

Exceptions: Farmers with at least 2/3 of their income from agriculture, are exempt from filing estimated tax.

Reforestation Tax Treatment1. First $10,000 is fully deductible2. Write-off (84-months) of all amounts

over $10,0003. Both deductions taken as

“Adjustments to Income” (no need to itemize)

4. Equally available to small businesses and investors.

5. Elected on a property by property basis each tax year.

6. May not include cost-share amounts excluded from income (IRC 126)

EXCLUSION OF COST-SHARE PAYMENTS

1. Must be for approved practices under approved programs. Rental payments such as CRP do not qualify. Neither do payments for perpetual or temporary easements.

2. Payment must not substantially increase the gross receipts of the landowner from the property being improved.

NEW FERTILIZER RULES

Revenue Ruling 2004-62

Allows deduction of fertilizer expenses in the year incurred.

Owners will need to file Form 3115 if changing from amortization to expensing.

CASUALTY LOSS

FireHurricanesWindIce, Sleet, HailEarthquakeVolcanoAuto, Plane CrashCombinations of above

“Sudden, unexpected, unusual…”

CASUALTY CALCULATION

Casualty loss is limited to FMVOR

Adjusted Basis

Whichever is less!

SALVAGE

Sales receipts from salvageLess: Adjusted BasisLess: Costs of SalePlus: Insurance recoveryEquals: Net Gain or Loss

TAX DEFERRAL FROM GAIN

Income tax deferral if casualty gain is re-invested in “like” property within two tax years.

Standing timberTimberlandSeed or seedlingsReforestation Costs

Note: Concept also applied to other “involuntary conversions”, bark beetles, drought for example.

DROUGHT

Rev. Ruling 90-61 permits a deductible loss if drought causes greater than normal mortality.

Amount of Loss:Loss limited to adjusted basis in propertyDepletion used for merchantable timber

Nature of the Loss:Non-casualty involuntary conversion (1231)Loss available to both investors and

business

BARK BEETLESDoes not qualify as casualty loss.

Does qualify as business loss (165).

Loss limited to adjusted basis or reduction in FMV.

Loss is ordinary if no offsetting capital gains from salvage.

Loss is capital loss if long-term capital income results from salvage (just like any other timber sale).

Net gain qualifies as involuntary conversion (1033) eligible for non-recognition of gain if replacement properties purchased with proceeds within two years.

Loss is equally available for investors and businesses, not subject to passive loss rules.

Tax rate and Exempted Amount

Year Tax Rate Exempted Amt.2009 45%$3,500,0002010Repeal of Estate Tax (no step up on all assets, limited to ~$4.3 million)2010 35% $5,000,0002011 35% $5,000,0002012 35% $5,000,0002013 55% $1,000,000

Stepped Up Basis2005-09 ````FMV Date of Death

2010 Limited to $1.3 million per decedent Additional $3 million to assets transferred to spouseRequired to file “return relating to large transfers”

2011 Back to Unlimited Step-Up Transportability of “unused” Spouse Exemption

Other Important Considerations• Portability of Residual $5 Million per

Spouse• IRC 2032 to increase to $1,020,00

– Farming/Forestry Special Use for 10 years

• 2013 Rate to Climb to 55% • 2013 increase to Capital Gains rate

of 3.8% ( part of the Health Care act)

Tax Resources• National Timber Tax Website:

www.timbertax.org– Extensive: Income, estate and property law– Professional referencing

www.ruraltax.org• Service and Publications by Extension,

State Agency and University