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> Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.

The Economics of Forestry in the US
If timber prices follow historical trends real yields over the next 10 years will probably be in the 8%-10% range.

US Forestry Taxation
Although forestry is not exempt from tax in the United States, the effective level is not high and recognises the long term nature of the business.

Calculation of Taxable Income
The authority for deducting management and operating expenses associated with an "investment" is section 212 of the Internal Revenue Code.

Establishing The 'Basis' Of Forestry Assets
For purchased assets, the basis is acquisition or establishment cost.

Casualty Losses
The tax treatment of losses to forestry assets resulting from Acts of God such as hurricanes and fire is generally considered one of the less satisfactory aspects of US forestry taxation.
Capital Gains Holding Requirements
Provisions of two recent tax acts, the Taxpayer Relief Act of 1997 and the The IRS Restructuring and Reform Act 1998, affect taxes on income from timber sales.
The Jobs & Growth Tax Relief Reconciliation Act 2003
The Act impacts timber owners through a lower long-term capital gains rate, lower marginal rates on ordinary income and increased deductions for capital investments by small businesses.

 

NB Information given here about the economics and taxation of forestry investments is strictly for general guidance and does not constitute investment or professional advice. Prospective or existing investors are strongly advised to seek professional advice on all aspects of investment in forestry and on its taxation, which is complex.

US Forestry Taxation

Although forestry is not exempt from tax in the United States, the effective level is not high and recognises the long term nature of the business.

There are three basic ways in which income can be realized from the ownership of timber property:

  • Revenue may come from the sale of logs, lumber, or other products generated by the trees themselves.
  • Income may be generated from rent for use of the property itself or from other services that the property produces such as hunting leases or payments from other recreational activities.
  • Income may come from the disposal of standing timber (stumpage), or by cutting the timber and electing to "treat the cutting as a sale".

Income under headings 1. and 2. will be treated as ordinary taxable income, but income under 3. may qualify for long-term capital gains treatment, and as such may be taxed at a lower rate.

Apart from reasonably favourable federal tax rules, many states have their own tax incentive programs. In general these provide property tax breaks to landowners who engage in sound forest stewardship. Often these programs provide the benefits of lower property taxes with state subsidized professional forestry assistance in developing private forest management plans.

The typical state tax incentive program requires that a landowner enroll his or her land for long periods of time, typically from 25-50 years, in a management plan developed or approved by the authorized state agency. To be eligible for the full tax break, the total parcel is also usually required to be larger than 10 continuous acres. Penalties for early withdrawal or harvesting are typically quite severe.

A fee is often assessed on the value of any timber harvested in accordance with the management plan. If timber is harvested in violation of the management plan or there is any other activity in violation of the management plan such as construction, over harvesting, or early withdrawal, the landowner may face a substantial retroactive tax assessment at current property tax rates.

The states also administer federal 'Forest Stewardship Programs'. Although this is a federally funded program that originated from the FTCA in 1990, it is typically administered by individual states to help shape private forest management on a regional level. Generally, the forest stewardship program provides states with the financial support necessary to assist private landowners in developing a sound forest management plan. In addition, states may also use forest stewardship monies to provide grants and cost-share opportunities to private landowners for wildlife habitat improvement, recreation development, aesthetic improvements, and soil or water protection.

Unlike the typical tax incentives program, obligations under the Forest Stewardship Program are slight. Landowners are usually only required to develop and sign a Forest Stewardship Plan and indicate their intention to use the grant monies to further their planned management goals. Typically the plan will address all aspects of the forest resource from future harvesting to timber stand improvement activities. To receive cost-share or grant money, the usual stewardship plan must describe the activity to be subsidized and requires a commitment to maintain the cost-shared practices for a specified number of years.

BACK TO TOP

 

The Economics of Forestry in the US
If timber prices follow historical trends real yields over the next 10 years will probably be in the 8%-10% range.

US Forestry Taxation
Although forestry is not exempt from tax in the United States, the effective level is not high and recognises the long term nature of the business.

Calculation of Taxable Income
The authority for deducting management and operating expenses associated with an "investment" is section 212 of the Internal Revenue Code.

Establishing The 'Basis' Of Forestry Assets
For purchased assets, the basis is acquisition or establishment cost.

Casualty Losses
The tax treatment of losses to forestry assets resulting from Acts of God such as hurricanes and fire is generally considered one of the less satisfactory aspects of US forestry taxation.
Capital Gains Holding Requirements
Provisions of two recent tax acts, the Taxpayer Relief Act of 1997 and the The IRS Restructuring and Reform Act 1998, affect taxes on income from timber sales.
The Jobs & Growth Tax Relief Reconciliation Act 2003
The Act impacts timber owners through a lower long-term capital gains rate, lower marginal rates on ordinary income and increased deductions for capital investments by small businesses.

 

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