timber tax management the maximization of after-tax returns from timber/land investments or...

Timber Tax Management

The maximization of after-tax returns from timber/land investments or businesses.

Your Instructor

• William L. (Bill) Hoover– Professor of Forestry

– Department of Forestry and Natural Resources

– Purdue University

– West Lafayette, IN 47907-1159

– 765/494-3580

– 765/496-2422

– [email protected]

Timber Tax Website http://www.timbertax.org

Purdue University &U.S. Forest Service

Publications

Forest Owners Guide to the Federal Income Tax, W.C. Siegel, W.L. Hoover, H.L. Haney and K. Liu, USDA Forest Service, Agriculture Handbook No. 708, GPO Stock Number 001-000-04621-7. “Official” timber tax publication.Order from:

U.S. Government Printing Office, Superintendent of Documents, Mail Stop: SSOP, Washington, D.C. 20402-9328, $15.00

Judge Learned Hand

“ There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible, everyone does so, rich and poor; and all do right. Nobody owes any public duty to pay more than the law demands; taxes are enforced exactions, not voluntary contributions.”

1872-1961, American jurist; b. Albany, N.Y. A federal judge from 1909 to 1951, Hand, a noted defender of free speech, was often known as the tenth justice of the Supreme Court. He published The Spirit of Liberty (1952) and Bill of Rights (1958).

Characteristics of timber activities and associated actions that should be taken

• High initial cost with little possibility of immediate recovery– Maximize proportion

of available basis allocated to recoverable assets

– Amortize reforestation expenditures


• Long pre-productive period– Structure activity

to allow write-off of qualified expenses against other income

Ridge top soft (red) maple tree – about 4 growth rings per inch


• Investment horizon multi-generational– Arrange affairs to

minimize liability for estate and other death taxes

– Transfer management before death

Timber As An Investment: Tax Aspects

• Not a tax shelter in classical sense – can’t write-off more than out-of-pocket investment.

• Major advantage is accumulation of value and pre-tax compounding.


• Long-term capital gains available– Disposal on stump as

capital asset (IRC Sec.1221)

– Disposal of stumpage held for use in trade or business (IRC 1231) or primarily for sale (631(b) & 1231)

– Sale of cut products with election to treat cutting as a sale (IRC 631(a) & 1231)


• Reduce revenue from disposals by basis of timber disposed of,– No percentage

depletion– “Depletion” applies

only to party severing timber

– Stumpage – recover “allowable basis”

California quail


• Carrying and operating costs usually deductible as business (IRC 162) or investment expenses IRC 212)

• Property tax relief may be available

What time do the picnickers arrive?

Use Form T – Forest Activities Schedule

• Form T