Eight Critical Tax & Management Tips for Forest Managers Mark Megalos Extension Associate Professor NC State University College of Natural Resources

This talk 1 Lower Ad Valorem (PUV) 2 Use the Reforestation Deduction 3 Use C/S Programs to lower investment Increase Returns 4. Document Basis 5. Keep good records, Capitalize / Deduct 6. Use a Business Approach - Market wisely 7. Use Long-term Capital Gains treatment 8. Plan your Estate

Lower Ad Valorem (PUV) #1 Place to start Ensures lands are taxed at their productive capacity –Defers FMV –Voluntary. Must apply. –Keep in current land use –20 Acres minimum

Lower Ad Valorem (PUV) Requires a Management Plan for COMMERCIAL FOREST PRODUCTION Saves of up to 95 % of annual tax bill Significant penalties when land use changes

2. Use the Reforestation Deduction First $10,000 is fully deductible Write-off (84-months) of all amounts over $10,000 Both deductions taken as “Adjustments to Income” (no need to itemize)

2. Use the Reforestation Deduction Equally available to small businesses and investors. Elected on a property by property basis each tax year. May not include cost-share amounts excluded from income (IRC 126)

3. Use C/S Programs to Lower Investment Costs / Increase Returns Cost Share Programs Leverage your Investment –40 % - 75 % or more Easy to Double your Returns Exclusion of Cost-Share Payment is Possible (IRC 126)

4. Document Your Basis Original basis of property is usually its cost, along with any other expenditures incurred to acquire the property. Basis must be allocated between land and timber Your Basis is deducted from your timber sale Sets the Cap of your Casualty loss Must be documented before timber is cut –Gifts retain owner’s basis –Inherited properties are “stepped-up”

4. Document Your Basis So What Does this Mean to You? Typical Timber sale: Gross Income$50000 Costs of Sale (8500) Basis (21500) Net Taxable Income $20000 Critical for Recently Acquired Properties

5. Keep good records, Capitalize / Deduct Basis (Initial and Adjusted) must be documented for Tax purposes –Management and Operating Expenses –Timber Accounts –Plantation or deferred reforestation account –Equipment and Building Accounts –Expenses, investments

6. Use a Business Approach - Market / Invest wisely Taking a Sound, Business Approach pays Dividend –Seeking Professional guidance For Appraisal For Sales Seeking Competitive Markets For Investment & Decision-making

LTCG Rates ( 2015 ) Income*Ordinary RateLTCG** $0-18,45010% 0% $18,451-74,90015% 0% $74, ,20025% 15% $151, ,45028% 15% $230, ,50033% 15% +3.8 $411, ,85035% 15% +3.8 $485, % 20% +3.8 *Married Filing Jointly 3.8 % New Medicare Surtax (high income folks) 7. Use Long-term Capital Gains Treatment

8. Plan your Estate The $5 million estate and gift tax exclusion is made permanent. The exclusion is inflation indexed –2013 $5.25 million –2014 $5.34 million –2015 $ 5.43 million Portability of unused lifetime exemption ( can 2X this limit if you play properly)

Summary: 1 Lower Ad Valorem (PUV) 2 Use the Reforestation Deduction 3 Use C/S Programs to lower investment Increase Returns 4. Document Basis 5. Keep good records, Capitalize / Deduct 6. Use a Business Approach - Market wisely 7. Use Long-term Capital Gains treatment 8. Plan your Estate

QUESTIONS??? THANK YOU!!