|
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.
Calculation
of Taxable Income
As
with any business enterprise conducted for profit
ordinary and necessary costs associated with day-to-day
operation and management may be deducted from
income. These are not capital costs and are not
associated with the disposal of an asset.
The
authority for deducting management and operating
expenses associated with an "investment"
is section 212 of the Internal Revenue Code; the
authority for deducting management and operating
expenses associated with a "business"
is section 162 of the Code. The Code clearly specifies
that the activity must be carried out with the
intention of making a profit and in recent years
the courts have consistently ruled that there
must also exist a reasonable expectation of eventually
making a profit.
In
deciding whether there is an intent to make a
profit, the IRS will consider a number of factors,
including:
- the
way in which an activity is carried out;
- the
presence of expertise and knowledge in carrying
out the activity;
- the
amount of time devoted;
- whether
the assets appreciate;
- the
success of the taxpayer in carrying out the
activity;
- the
taxpayer's history of income or losses;
- the
financial status of the taxpayer;
- whether
elements of personal pleasure or recreation
are involved.
All
the ordinary and necessary expenditures associated
with growing timber held with the intention and
reasonable expectation of producing income can
be recovered in one of three basic ways:
- by
deduction as an expense from income in the tax
year in which the expenditure occurs, or by
carry forward for recovery in a later tax year
(NB Losses can be carried back three years and
forwards fifteen years but can be lost on change
of ownership; if the owner is not active in
management decisions or is a partnership, then
the activity is considered passive - passive
losses can be carried forward indefinitely but
cannot be offset against non passive gains,
eg earned income).
- by
capitalizing permitted costs to be recovered
over a period of years through depreciation,
amortization, allowable basis, depletion, or
by sale or other disposal of the property.
- by
deduction from sale proceeds as costs of sale.
Deductible
expenses for forestry operations include interest,
land-related expenses, timber sale expenses, taxes,
tools and equipment, travel expenses, and tree
planting (reforestation). Some expenses, known
as "carrying charges," can be expensed
or capitalized at the discretion of the taxpayer.
In
the event that a consistent and reasonable profit
is not made (meaning, in at least 3 years out
of any period of 5 years) the IRS may apply what
are known as 'Hobby-Loss Rules' which are more
restrictive as regards permitted deductions. If
profitability depends upon returns from the eventual
disposal of land then it's necessary to include
discounted value from the eventual sale in order
to prove profitability. This will often require
an 'internal rate of return' calculation.
BACK
TO TOP
|
USA-INVESTMENT-TAX.COM 
