Introduction to Taxes

Basic Types of Taxes Property – ad valorem Death - ad valorem Income – salary, wages, profits, etc. Sales – price paid Value added (VAT) – tax on value added at each step in production and distribution Employment – salary and wages Other – excise, license, etc.

Property Tax Based on value of property –Fair market value –Assessed value –Milage rate x Assessed value = tax due 1 mil = $0.001 –Biases long-term investments in timber if standing timber is assessed Example

Impact of Ad Valorem Tax on Timber Land – increase $50 per year Timber – increase 6% per year Assessed value – 10% of market value Milage – 100, i.e. 1% Initial value of land -- $1,500 Initial value of timber -- $2,100 Annual Property Tax Due Land & Timber Land Only

Death Taxes Types –Federal estate gift –State estate Inheritance Basis for tax – ad valorem –Requires land and timber appraisal

Income Taxes Types –Federal –State –Local Basis –Earned income - Wages, salary, business profits –Gains from disposal of assets Sale price minus amount paid for it (basis) Depletion –Percentage – oil, gas, minerals –Cost - timber

Sales Tax Types –Federal Pittman-Robertson tax on ammunition, etc. Duck stamps On-road fuel Alcohol –State – some purchases exempt –Local – county, city Basis –Sales price

Employment Taxes Workmen’s compensation – form of insurance for on-the-job injuries Rates for Washington (per hour worked) OccupationCost/Hour Worked Assumed Wage Cost/$ of Wage Sawmill$2.2059$15$0.15 Shake & Shingle Mill $ $15$1.24 Logging$ $15$1.23 Pulp & Paper Mill $1.1502$20$0.06

Employment Taxes Unemployment –State (Indiana – 0.565% to 8.362%) –Federal Unemployment Tax Act (FUTA) 6% of first $7,000 of wages, less partial credit for state unemployment tax paid

Employment Taxes Federal Insurance Contributions Act (FICA), aka, social security –Employer pays 6.2% –Employee pays 6.2% (4.2% currently) –Capped at $110,100 in 2012 Medicare – hospital –Employer and employee – 1.45% each –No cap

Employment Taxes - Summary Assume a logging employee earning $40,000 LowHigh Workman’s Comp$30,000$49,200 FUTA$ 2,400$ 3,345 FICA$ 2,480 Medicare$ 580 Total$35,460$55,605

Other Taxes License fees –Registered forester, logger –Vehicles –Hunting –Fishing Excise –Import tariffs

Forester’s Role Provide valuations needed for basis allocation –Timber –Land Allocation procedure –Original basis Purchase – acquisition cost Inheritance – date of death fair market value, stepped-up basis (“stepped-up basis”) Gift – grantor basis carries over (“carryover basis”)

Forester’s Role –Allocation of original total basis Basis of each asset is it’s % of total fmv times original total basis, e.g. –Acquisition cost - $100,000 –FMV timber - $75,000 –FMV land – $50,000 –Total fmv - $125,000 »Timber is 60% »Land is 40% –Original basis of timber - $100,000 x 0.60 = $60,000 –Original basis of land - $100,000 x 0.40 = $40,000 –Total original basis is $100,000

Forester’s Role Assisting with timber sale –Ask if seller has basis in timber –If they do provide estimate of total volume on tract, not just volume to be sold How to claim timber depletion on sale –Depletion unit = $ basis / total volume $60,000/ 300 MBF = $200 per MBF –Depletion allowance = Depl. unit X Volume sold $200 per MBF x 150 MBF sold = $30,000

Forester’s Role Gain on timber sale –Revenue from sale less Depletion allowance $55,000 revenue - $30,000 depl. allowance = $15,000 taxable gain Warn client that timber sale revenue is taxable even if they don’t get an IRS Form 1099-S. This form now required.

Forester’s Role Explain long-term capital gains treatment –Ordinary income if not sold on the stump –Warn them that if they sell “on the shares” the contract must grant logger a “contract right to cut timber on their own account” –Otherwise If owned more than 1 year it’s long-term capital gain on Form 1040, Schedule D –Taxed at 0% or 15% –If not capital gain – rate may be as much as 40% plus 15.3% self-employment tax