Presentation on theme: "The Federal Income Tax Update Dr. Linda Wang. A Tax Expert Who is the figure behind every great man, the individual who knows his ultimate secrets? A."— Presentation transcript:
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
Timber Sale Long-term capital gain If you own your timber for more than 1 year, your sale are taxed at the beneficial long-term capital gain rate of maximum 15% (Sec. 631(b) or Sec. 1221)*, not the ordinary rate of maximum 35% * if you cut stumpage and get paid from the mill for delivered timber, only part of the payment you received is long-term capital gain, the difference between the FMV of timber and delivered timber price is taxed as ordinary income (Sec. 631(a))
Timber Sale Filing requirement Timber as investment: File Schedule D and Form T (may be required) Timber as business: File Form 4797, Schedule D, and Form T (may be required)* *Schedule C for Sec. 631(a) cutting
Form T Filing requirement Form T is required if you: Claim a cost/basis deduction ( depletion ) Outright sale in timber business (Sec. 631(b)) Cut stumpage and sell delivered product (Sec. 631(a)) * Exception: you are not required to file Form T if you only have an occasional sale of timber
Forest Planning Cost Tax Law Changes Cost incurred in 2008 no longer use one-time 10% investment tax credit The 10% investment tax credit was repealed in 2004 (by American Jobs Creation Act of 2004)
Forest Planning Cost New tax write-off rules The new rules are: Deduct the first $10,000 cost Excess over $10,000 may be deducted (amortized) over 8-year
The Size of the IRS IR S Si ze In fiscal year 2006, the IRS employed almost 100,000 people and had a total budget of about $10 billions! Source: IRS website
Purchased Timberland Establishing Basis for Land and Timber Basis is the cost of purchase, plus other acquisition costs such as survey, forester s fee, and legal fees You may deduct the basis from timber sale, reducing taxable income at sale Basis for land and timber must be separately documented
Timber Casualty Loss Tax Deduction May be Limited Casualty loss: if loss caused by sudden, unexpected and unusual forces such as fire or storms (hurricane, ice, wind … ) The amount of deduction is the lesser of: (1) the adjusted basis of timber or (2) the FMV loss
Timber Casualty Loss Two Key Points Basis is for the entire property (not just the destructed portion) if one tax account is maintained for the entire property Salvage sale may be tax-deferred if reinvested in forestry
Timber Casualty Loss New Audit Guide from the IRS The IRS issued a new audit guide for timber casualty loss in September 2005 Timber Casualty Loss Audit Techniques Guide Verification of basis and FMV valuation of loss are two focal points of audit.
The Rich Learned to Have Money Work for Them B us h 04 R et ur n President George W. Bush 2004 Tax Return Salary $397,065 Interests $363,483 $672,788 Total Taxes: $207,307 Refund: $38,534
The Rich Learned to Have Money Work for Them Vi ce P. C he ne y Vice President Richard Cheney 2004 Tax Return Salary $425,584 Dividend $326,729 Business Income $533,197 Capital Gains: $222,463 Rental: $203,976 $1,734,373 Total Taxes: $393,518 Owe: $102,663
The Rich Learned to Have Money Work for Them T er es a H ei nz 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
Cost Share Payment Received Two Options Generally the payment must be included in income The expense may be deducted as part of the forest management costs
Cost Share Payment Received Qualified Program for Income Exclusions However, qualified cost share payment may be excluded from income (Sec. 126) Forest Land Enhancement Program (FLEP) Conservation Reserve Program (CRP) Environmental Quality Incentives Program (EQIP) Wetland Reserve Program (WRP) Wildlife Habitat Incentive Program (WHIP) Forest Renewal Program (SC)
Cost Share Payment Received Exclusion Calculation Last year you harvested 40 acres and received $84,500 for the timber. This year, you replanted the 40 acres at a cost of $6,000 ($150/acre). You received $3,900 in CRP cost-share payments to cover the cost of replanting. How much of $3,900 cost-share payment can be excluded from your gross income?
Cost Share Payment Received Exclusion Calculation Step 1: Compute 10% of the average annual income for the 3 previous years: 0.10 x ($84,500/3) = $2,817 Step 2: Multiply $2.50 times the number of affected acres $2.50 X 40 = $100
Cost Share Payment Received Exclusion Calculation Step 3: Compare the two values: $2,817 is larger. Divide it by the interest rate: $2,817 / 7.56% = $36,823 Step 4: $36,823 is larger than $3,900; you can exclude the entire FIP payment from your gross income.
New Tax Laws in 2007 Tax relief for business In May 2007, the first major tax law was enacted: Mom and pop timber business have the option not being taxed as partnership
New Tax Laws in 2008 Tax Incentives for Business Business owners may write off up to $250,000 for property purchased and placed in service in 2008 ( Sec. 179 Deduction ) Deductions are reduced if investment is more than $800,000 Bonus Depreciation: businesses may deduct 50% of the cost ( basis ) of property purchased and placed in service in 2008
Lump-Sum Timber Sale and Form 1099 New IRS Regulation Proposed In November 2007, the IRS proposed to require Form 1099 reporting for lump-sum timber sale Effective date: after the final regulations adopted in the Federal Register Source: REG-155669-04
Forest Landowners Guide to Federal Income Tax National Timber Tax Website: www.timbertax.org State Agency and Extension Websites J.K. Lassers Your Income Tax IRS Publication 17: Your Federal Income Tax Reference Materials BooksBooks