Federal Timber Income Taxes and Private Forest Landowners in the U.S

Recent concern has risen among forestry professionals that forest landowners are unaware of federal income tax provisions available to them that make forest management more cost effective. This concern specifically focuses on nine provisions. These nine provisions are: the treatment of timber income as capital gain, the deduction of annual management costs, depreciation of tangible property, the section 179 deduction, recovery of investment through depletion, the reforestation tax credit, amortization of reforestation costs over eight years, the exclusion of cost-share payments from gross income and deductions for casualty losses.

The publication is divided into three major parts. In Part I the specifics of the nine provisions are covered in detail according to the current Internal Revenue Code. Current income tax rates are examined. The Passive Activity Loss Rules (PALS) are reviewed in terms of how they affect landowner eligibility to use the nine provisions for current loss deductions. PALS limitations incurred by holding forestland as a passive trade or business, or active trade or business are examined. Advantages and disadvantages to holding forestland as an investment are also examined.

In Part II, the effects of timber income taxes on forestland investments are explored. Examples of taxes incurred (including the alternative minimum tax) when timber is sold are given. Tax calculations are based on a typical southern landowner involved with the management of a loblolly pine plantation. In Chapter 6, effects of using the nine income tax provisions on the land expectation value (LEV) of a typical forestland tract are examined for a high-income forest landowner and a low-income forest landowner engaged in both intensive and non-intensive loblolly pine management in the South. Cumulative effects of using or not using the nine income tax provisions in each regime are shown to dramatically influence LEV, and the importance of tax provision awareness is emphasized. In Chapter 7, the complexity of complying with timber tax law is examined. This chapter' s purpose is to provide an example of the detail involved in taking advantage of the tax laws. A demonstration of tax complexity is made with income tax calculations for the medium-income landowner in Chapter 6. The landowner first thins his 120-acre plantation in tax year 2003, and forms required by the IRS to use the tax provisions are identified and discussed. Although use of the provisions is essential for maximum economic returns, their complexity can discourage landowners from electing to use them.

Part III presents the results and discussion of a mail survey sent to members of the American Tree Farm System (ATFS). In the survey questionnaire, landowners were asked if they were aware of the nine tax provisions, and if they used them where applicable. They were also asked why they failed to use certain provisions when they know about them. Various hypotheses are tested in Chapter 13. The demographics of ATFS members are compared with the demographics of the general U.S. forest landowner population as described by Birch (1996). The ATFS population was more timber production as well as more land investment oriented. ATFS members have significantly more harvesting experience than the general landowner. Tree Farmers typically own larger parcel sizes than the average landowner. ATFS members belong to a forestry organization, and ATFS members are more motivated in terms of forest management than the typical landowner. The results show that ATFS awareness and use of the tax provisions are low. Thus, increased efforts by natural resource professionals to inform landowners of their tax options are indicated. Caution should be used when interpreting survey results, because over 70% of ATFS members use tax professionals to file their income taxes. Consequently, actual use of tax provisions could be higher than predicted if the tax professionals are well versed in dealing with timber income.