Timber Taxes. Dr. Linda Wang National Timber Tax Specialist U.S. Forest Service

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1 Timber Taxes Dr. Linda Wang National Timber Tax Specialist U.S. Forest Service

2 Disclaimer The materials and discussions are not legal or accounting advice. 2

3 Powerful Influence of Taxes Tax has been consistently listed as one of the top concerns for private forest owners 3

4 Today s Content Capital Gains Sec. 179 and Bonus Depreciation 1031 Exchanges plus Bonus material 4

5 Capital Gains 5

6 Ordinary Income vs. Capital Gains Capital gains Sale of capital asset Ordinary income o Wage o Self employment income o Sale of inventory 6

7 2015 Tax Rates Ordinary income 10% 39.6% Long term capital gains o 0% o 15% o 20% 7

8 Sweeping Tax Changes by the Fiscal Cliff Bill Long term capital gain maximum tax rates 20% rate If your income is over: o $450,000 (joint returns) or o $400,000 (single) 8

9 Taxation of Timber Income For more than 60 years, Congress has provided tax incentives to promote the management of the nation s timber resources Capital Gains For qualified timber cutting and sales 9

10 Capital Gains and C Corporation Capital gains are separately classified but taxed at C corporate tax rates (no special rates). Exception: 2008 allowed a one year 15% corporate rate for gains from timber 10

11 New 3.8% Tax The tax applies ONLY to single taxpayers with adjusted gross income over $200,000 or couples with over $250,000 11

12 An Example: 3.8% Tax A single taxpayer gross income: Salary of $200,000 and $60,000 investment timber sale ($260,000 $200,000 threshold) x 3.8% = $2,280 12

13 Quiz What s the maximum tax rate for longterm capital gains?

14 A Tax Expert? Who is the figure behind every great man, the individual who knows his ultimate secrets? A father confessor? Hell no, the tax expert. Louis Auchincloss

15 Presidential Tax Return President George W. Bush 2004 Tax Return Salary $397,065 Interests $363,483 $672,788 Total Taxes: $207,307 Refund: $38,534

16 Depreciation 16

17 Depreciation Regular depreciation Sec. 179 expensing Bonus depreciation 17

18 Sec. 179 Deduction $25,000 deduction on machine or equipment purchase cost Deduction phase out starts at $200,000 cost of property purchased The law is expected to change 18

19 In 1944, Americans must work the first 90 days, until March 30, to pay all taxes. By 2014, it was April 21. Tax Foundation

20 Quiz If your adjusted gross income is $150,000, you are not subject to the new 3.8% tax. True or False? 20

21 Sec Exchange 21

22 1031 Exchanges This tax strategy allows deferral of capital gains It s also called Like Kind Exchange Court cases 22

23 The Size of the IRS In 2014, the IRS employed almost 90,000 people and had a total budget of about $11 billions!

24 Bonus 24

25 Taxation of Timber REITs A REIT is required to pay out at least 90% of its income to its shareholders and is allowed to deduct such distribution, which make it largely avoid double taxation of its income Timber income paid from a REIT is taxed as capital gains for the shareholders 25

26 Double Taxation of C Corporation Corporate profits are taxed to the corporation. Corporate owners pay taxes again on the income paid out by the corporations 26

27 Qualification for REITs Numerous requirements: 75% asset test: at least 75% of a REIT s asset must be real estate, cash, and government securities 27

28 Qualification for REITs A REIT must derive at least 95% of its income from investment; 75% from real estate source Prohibited Transaction such as sale of logs held as inventory is subject to 100% tax Failure to maintain a REIT status is subject to penalties, additional taxes and termination 28

29 REIT s Tax Disadvantages REIT tax laws are complex, increasing compliance costs, burden and risks Losses of a REIT may not be passed to the investors 29

30 Quiz Timber income paid from a REIT is taxed as capital gains by the shareholders. True or false? 30

31 Reforestation Tax Deduction Deduction: Amortization: deduct the first $10,000 per year of qualifying expenses amortize any additional amounts over 8 tax years 31

32 Estate Taxes and Timberland Exemption: $5.43 million estate per person Special use valuation provides relief to timber estate (sec. 2032A) 32

33 Foreign Payment 30% Withholding Regime Requires withholding 30% on payments to foreign investors unless it meets disclosure requirements 33

34 Tax Return Teresa Heinz 2003 Tax Return Salary $0 Tax Exempt Interests $2,781,791 Dividends $2,216,280 Taxable Income $2,023,596 Total Taxes: $628,401 Refund: $247,933

35 Tax Resources by US Forest Service Tax Tips for Forest Landowners for the 2015 Tax Year Federal Income Tax Guide for Forest Landowners US Forest Service Forest Taxation website National Timber Tax Website: timbertax.org 35

36 Federal Income Tax on Timber A Quick Guide for Woodland Owners Fourth Edition

37 Summary Long term capital gains are important for timber owners and businesses Sec. 179 deduction and bonus depreciation are nice tax deductions Sec exchanges defer taxes 37

38 Summary on the Bonus Part A REIT largely avoids double taxation Reforestation costs are tax deductible Estate tax exemption for 2015: $5.43 million 38

39 Rising Tax Code Complexity 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Words Gettysburg Address Declaration of Independence Constitution Bible Tax Code and Regulations Source: Tax Foundation