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.

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.

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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.