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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.
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.
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. No special allowance
is made for the fact that timber is an uninsurable
appreciating asset with a very low basis to most
owners. States which suffer major catastrophes
often ask Congress to allow casualty loss deductions
based on the fair market value of the timber destroyed;
but Congress has not acted.
A
casualty loss is defined as an actual loss of
tangible or measurable property which is "evidenced"
by a closed and completed transaction, fixed by
identifiable events," and actually sustained
during the taxable year. For a casualty loss to
occur the event causing the casualty must be a
natural or other external force acting in a sudden,
unexpected, or unusual manner. This means that
losses due to tornadoes, hurricanes, wild fires,
etc. are deductible, but losses due to disease
or insect infestations generally are not (but
would still count against the adjusted basis via
the depletion unit mechanism).
The
amount of the deductible loss is the lesser of:
The decrease in the fair market value of a "single
identifiable property (SIP)," or
The
adjusted basis of the "single identifiable
property,"
less
any insurance proceeds, salvage value or other
compensation received.
A
"single identifiable property" (SIP)
means either the individual units of timber (cords,
board feet, etc.), or the entire block of timber
affected by the casualty event. Block refers to
all the timber in a given timber account. The
rules permit damaged timber to be included along
with destroyed timber.
SIPs ought to be clearly identified in forestry
accounts. The establishment of SIPs after the
event to maximise deductible losses will probably
not be allowed by the IRS.
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.
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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