| 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.
The
Jobs & Growth Tax Relief Reconciliation Act
2003
The
Act impacted 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.
For
ordinary income the 10% and 15% rates stayed the
same. The 27% rate dropped to 25%, 30% to 28%,
35% to 33%, and 38.6% to 35%. These reductions
were effective retroactively to January 1, 2003.
The
maximum rate on net long-term capital gains dropped
from 20% to 15%, and the capital gains rate for
taxpayers in the 10% or 15% ordinary income brackets
fell from 10% to 5%. In 2008 this 5% rate falls
to 0%, but on January 1, 2009 the rate was set
to go back to the 20% and 10% rates because of
sunset provisions. In 2005/2006 the Bush administration
was trying very hard to delete them, and prior
to the dramatic reversal of the balance of power
in Congress after the mid-term elections, which
gave the Democratic Party control over both chambers
of Congress for the first time since 1994, was
somewhat successful (for more on which, see below).
Under
certain circumstances the tax on gains on sales
and exchanges of property held for more than five
years was 18% instead of 20%, or 8% instead of
10%. These 5-year gains rates are eliminated.
Deductions
of capital losses against ordinary income are
still limited to $3,000 per year for individual
taxpayers. Small
businesses can deduct currently instead of depreciating
up to $25,000 worth of qualified property placed
in service during the year, the Sec. 179 deduction.
The amount decreased by $1 for each dollar of
qualified expenses over $200,000, the “phase-out
threshold.” The amount qualifying for deduction
increases to $100,000 for years 2003, 2004 and
2005. These amounts were indexed for inflation
in 2004 and 2005. In addition, the phase-out threshold
increases to $400,000.
Dividends
paid by C corporations to stockholders remain
subject to double taxation. The corporation pays
tax at the corporate rate and then pays dividends
from after-tax income. These dividends are then
taxed on the recipient’s tax return at their
individual rate. Effective January 1, 2003 specific
rates applied to dividend income, 5 percent and
15 percent. Thus, long-term capital gains and
dividends will be taxed at the same rate.
The
reduced rates apply from January 1, 2003 to December
31, 2008. A zero-percent rate will apply to taxpayers
in the 10- and 15-percent tax brackets for 2008
only. All the reduced rates end after December
31, 2008, although as with the capital gains tax
changes Congree may legislate to perpetuate the
lower rates.
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