1. Introduction to Taxes

2. Basic Types of Taxes Property – ad valorem Death - ad valorem
Income – salary, wages, profits, etc.
Sales – price paid
Employment – salary and wages
Other – excise, license, etc.

3. 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

4. Impact of Ad Valorem Tax on Timber
Annual Property Tax Due
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
Land & Timber
Initial value of timber --$2,100
Land Only

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

6. Income Taxes Types Basis Federal State Local
Wages, salary, business profits
Gains from disposal of assets
Sale price minus amount paid for it
Timber depletion very complicated

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

8. Employment Taxes Workers comp Unemployment
State
Federal Unemployment Tax Act (FUTA)
Federal Insurance Contributions Act (FICA), aka, social security
Medicare – hospital
Paying $1 of wages requires paying $0.35 to $0.50 in taxes

9. Other Taxes
License fees
Registered forester, logger
Vehicles
Excise

10. 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
Gift – grantor basis carries over

11. 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

12. 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

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

14. 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