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Timber Tax
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Timber Tax Provisions

The timber tax provisions in the Internal Revenue Code are essential to the economic viability of owning and managing productive timberland in the US. It is imperative that we remain vigilant in ensuring policy makers understand the unique operations of managing and owning timberland.  A prime example of why FLA's engagement on your behalf is so vital was the release by the Joint Committee on Taxation of the costliest tax break by sector, where timber tax breaks ranked among the costliest for natural resources and agriculture industriesRest assured, FLA is working not only to safeguard timber tax provisions in tax reform efforts, but that they are not put on the chopping block and seen as a “special interest” tax break.

 

FLA’s success will result in major annual and lifetime financial savings and gains to your forestry business and family.

 

The following examples demonstrate the budgetary impact timber taxes could have on your forestry business if they were eliminated.

1. Deduction of Management and Operating Costs

Sections 162 and 263A(c)(5): Deduction for the operating costs of forest management, including prevention measures (fire, pest and disease), thinning, post-establishment fertilization, interest, taxes, protection of wetlands, and forestry activities.

 

Potential Annual Monetary Impact
Approximately $210,000 for 1,000 acres and $1 million for 5,000 acres.

Case Scenario

  • 1,000 and 5,000 acres of pine timberland with trees of various ages
  • Detailed forest management plan is followed

Annual Forestry Management Activity

Cost/Acre*

1,000 Acres

5,000 Acres

Prescribed burning

$18.18

$18,180.00

$90,900.00

 

Removing undesirable trees

$29.89

$29,890.00

$149,450.00

 

Timber Cruising

$2.75

$2,750.00

$13,750.00

 

Marking trees for harvesting

$29.64

$29,640.00

$148,200.00

 

Planting by hand

$0.11

$112.20

$561.00

 

Planting by machine

$0.14

$140.00

$700.00

 

Precommercial thinning

$50.27

$50,270.00

$251,350.00

 

Fertilization

$79.49

$79,490.00

$397,450.00

 

Total Annual Cost

$210.47

$210,472.20

$1,052,361.00

 

*Estimates based on the average cost data for nine common forestry practices in the U.S. South 2014 Survey prepared by Dr. Becky Barlow, Alabama Extension, Forestry Extension Specialist and Associate Professor, School of Forestry and Wildlife Sciences.

These costs are currently deductible the year they are incurred and are viewed as necessary business expenses. If they were to be eliminated in a tax reform bill, these costs would not be deductible annually and would have to be capitalized, hence only being deductible when timber is sold and income is realized.  Such a financial burden would be extremely difficult financially for a family forestry business to continue active and sustainable forest management on their property.

2. Timber Capital Gains

Capital gains treatment for the harvest of timber or sales of standing trees. (Sections 1231(b)(2) and 631(a)&(b))

 

Potential Monetary Impact
This timber tax provision could have a monetary impact of $72,500 being taxable income instead of only $27,500 being taxed from the sale of timber based on an 800-acre tract with 1/8 being timbered.  Maintaining this timber tax provision allows for $45,000 to NOT be taxed as income by the IRS.

Case Scenario

Ü  800 acres of mixed pine and hardwood timberland; some of the timber is merchantable, some is not.  

Ü  The fair market value of the merchantable timber is $400,000. 

Ü  Depletion basis in the merchantable timber is $40,000 since there has been no step-up in basis due to inheritance for many years. 

Ü  Approximately one-eighth of the merchantable timber was cut in 2017 with the fair market value of the standing trees being $50,000.

Ü  A contractor was paid $7,500 to cut the trees, produce the logs and deliver them to the mill.

Ü  $85,000 is paid to the timber owner from the mill for the delivered logs.

Using the provisions of IRC Section 631(a), the long-term capital gain for tax purposes is $45,000 ($50,000 minus $5,000 basis). The ordinary income for tax purposes is $27,500 ($85,000 minus $50,000 minus $7,500). Without the benefit of Section 631(a), there would be no capital gain and the entire $72,500 would be taxed as ordinary income. Continued, sustainable forest management would be severely curtailed since timber income is only realized periodically, not every year.

3. Reforestation Costs

Deduction up to or above $10,000 for the reforestation costs per stand, with the remainder amortized over 84 months. (Section 194).

 

Potential Monetary Impact
This timber tax provision allows you to immediately deduct up to $10,000 in reforestation cost in the year the expense was incurred and then continue to deduct the remainder of the expenses proportionally for the next 7 years.  Without the benefit of IRC Section 194, the entire reforestation cost of $28,000 in the scenario below would have to be capitalized without being recoverable (deducted) until the timber was harvested many years later.

Case Scenario

Ü  Following a harvest on 150 acres of your pine timberland, you prepare the site for planting in the 2015 using a combination of chemicals and burning. The cost was $14,000.

Ü  In 2016, you replanted the acreage with a cost of $14,000.

Ü  The total cost for your reforestation activities was $28,000 for 2015 and 2016.

Ü  Under Sec. 194 of the tax code, you can treat your reforestation activities as an investment and claim a deduction of up to $10,000 in each year, with the remaining cost being amortized over 

Ü  Section 194 allows you to immediately deduct $10,000 for reforestation expenses in 2015 and again in 2016, with the remaining $8,000 being deducted as an expense proportionally each year during the next 7 years.

 

 

 

 

 

 

 

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