1. W. Hoover, Purdue, whoover@purdue.edu
Your Investment
Land
Merchantable timber
Premerchantable timber
Wildlife habitat
Improvements – roads, drainage structures, trails
Your time – cost or benefit?
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W. Hoover, Purdue,

2. W. Hoover, Purdue, whoover@purdue.edu
What’s Its Purpose?
Ultimate expression
of manliness!
Lifestyle?
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W. Hoover, Purdue,

3. W. Hoover, Purdue, whoover@purdue.edu
Financial
After-tax ROI
Build wealth
Cover holding and management costs
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W. Hoover, Purdue,

4. How Income Tax Law Can Help
Accumulate wealth “before tax”
Property tax an itemized deduction
Other expenses may be deductible if forestland is held for the production of income
Investment – misc. itemized deduction
Business – “above the line” deduction
Gain on timber
Capital gains rate
No self-employments tax

5. How Estate Tax Law Can “Help”
Pass to spouse with no tax
Stepped-up basis for heirs
But, “excludable” amount and marginal tax rate after 12/31/10 are $1 million and 55% (unless Congress acts)
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W. Hoover, Purdue,

6. Covers developments through 2000
Publications
Forest Owners Guide to the Federal Income Tax,
H.L. Haney, W.L. Hoover, W.C. Siegel and J. L. Greene USDA Forest Service, Agriculture Handbook No “Official” timber tax publication.
Badly out of date,
Covers developments through 2000
4/6/2019
W. Hoover, Purdue,

7. Updated and expanded at least annually
Publications
Timber Tax Management for Family Forest Owners William L. Hoover and Mark Koontz, Timber Tax, LLC, 1050 W. Bacall St. , Meridian, ID
Order at
Updated and expanded at least annually
4/6/2019
W. Hoover, Purdue,

8. W. Hoover, Purdue, whoover@purdue.edu
Websites
National Timber Tax Website
Maintained by USDA Forest Service
Timber Tax, LLC
A work in progress
Focus is on tax professionals
4/6/2019
W. Hoover, Purdue,

9. Timber As An “Investment”
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.
4/6/2019
W. Hoover, Purdue,

10. Characteristics of timber activities and associated actions
High initial cost with little possibility of immediate recovery
Maximize proportion of available basis allocated to recoverable assets
Deduct and amortize reforestation expenditures
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W. Hoover, Purdue,

11. W. Hoover, Purdue, whoover@purdue.edu
Allocation of Basis
Original basis
Acquisition cost for purchase
Date of death fair market value for inheritance
Donor’s basis on date of gift
Allocate original basis among assets based on proportion of total fair market value each asset represents
Example
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W. Hoover, Purdue,

12. Characteristics of timber activities and associated actions
Long pre-productive period
Structure activity to allow write-off of qualified expenses against other income
Business
Investment
Hobby
Pennsylvania Black cherry
4/6/2019
W. Hoover, Purdue,

13. W. Hoover, Purdue, whoover@purdue.edu
Investment Expenses
Take standard deduction
No benefit at all
Capitalize carrying charges
Itemize
Property tax
Add to other deductible taxes on Form 1040, Schedule A, Line 6 – Real Estate Taxes
Operating expenses
Add to other Miscellaneous Itemized Deductions on Form 1040, Schedule A, line 27, with attachment
No benefit until Miscellaneous Itemized Deductions exceed 2% of Adjusted Gross Income
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W. Hoover, Purdue,

14. W. Hoover, Purdue, whoover@purdue.edu
Business Expenses
Claim deductible expenses on business form
Sole proprietorship
Corporation, C or S
LLC
Partnership
Estate
Operating loss has same affect as adjustment to gross income
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W. Hoover, Purdue,

15. W. Hoover, Purdue, whoover@purdue.edu
Hobby Loss Rule
What it says
If an activity produces a “profit” for 3 years in a consecutive period of 5 years, the IRS presumes the activity is engaged in with an intent to make a profit
4/6/2019
W. Hoover, Purdue,

16. W. Hoover, Purdue, whoover@purdue.edu
Hobby Loss Rule
Owners of small timber tracts can’t meet this test because of inherent nature of timber production process
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W. Hoover, Purdue,

17. Hobby Loss Rule - Hoover’s definition of profit
Amount by which income from timber and other outputs plus appreciation in value of land and growing stock exceeds expenses of operation over expected life of activity
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W. Hoover, Purdue,

18. Reforestation Expenses
Deduct up to $10,000 per year per qualified timber property (QTP)
Amortize amounts over $10,000 per QTP in a given year
Details
4/6/2019
W. Hoover, Purdue,

19. W. Hoover, Purdue, whoover@purdue.edu
Characteristics of timber activities and associated actions that should be taken
Investment horizon multi-generational
Arrange affairs to minimize liability for estate and other death taxes
Transfer management before death
4/6/2019
W. Hoover, Purdue,

20. W. Hoover, Purdue, whoover@purdue.edu
Timber Revenue
Always can qualify for capital gains treatment
Only exception is timber broker
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W. Hoover, Purdue,

21. Capital Gains Advantage
Individuals
No 15.3% self-employment tax
Capital gains rates
0% for 10% and 15% ordinary income brackets
15% otherwise
Applies to “net long-term capital gains”
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W. Hoover, Purdue,

22. Capital Gains Advantage
Non-corporate business
Capital gains pass through to owners
Owners pay tax on their share of gain at their individual rate
C corporations
No rate advantage, but
Gains and losses offset each other
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W. Hoover, Purdue,

23. Capital Gains in 2011 & Beyond
Without congressional action
Capital gains rate will be 20% because of reversion to pre-EGTRRA tax law
President’s current proposal
20% rate for c.g. & qualified dividends of joint filers >$250,00 after std. deduction & 2 personal exemptions, and >$200,000 for single
Otherwise current 0% and 15% rates apply
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W. Hoover, Purdue,

24. Qualifying for capital gains
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), pay-as-cut contract no longer required
Sale of cut products with election to treat cutting as a sale (IRC 631(a) & 1231)
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W. Hoover, Purdue,

25. W. Hoover, Purdue, whoover@purdue.edu
Recovering basis
Reduce revenue from disposals by basis of timber disposed of,
No percentage depletion
“Depletion” applies only to party severing timber
Stumpage – recover “allowable basis”
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W. Hoover, Purdue,

26. Use Form T – Forest Activities Schedule
Revised in December 2005
Don’t file if you only make an occasional sale of timber, 1 or 2 every 3 or 4 years
Always complete and keep in your files
If make sales more often, file if
Claim a deduction for depletion
Elect under section 631(a)
Make an outright sale of timber under 631(b)
Form T and Instructions
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W. Hoover, Purdue,