Afa income tax chapter 1


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  • Updated 18 October 2010 Updated 15 July 2010 Updated 20 April 2010 Updated 25 January 2010 Updated 16 October 2009 Updated 23 July 2009 Updated January 2009 with 4Q 2008 TMS journal Updated 24 July 2008 Updated May 2008 with 1Q 08 TMS Journal Updated January 2008 with 4Q 07 TMS Journal Updated 24 April 2007 with 1Q 07 TMS data
  • Afa income tax chapter 1

    1. 1. Timber Income Tax Harry L. Haney, Jr., Ph.D. Garland Gray Emeritus Professor of Forestry Virginia Tech And Adjunct Faculty atDepartment of Forestry and Natural Resources, Clemson AndWarnell School of Forestry and Natural Resources, UGA
    2. 2. Timber Taxationfor Forest Landowners aneProfessionals October 30, 2011 Arkansas Forestry Association Little Rock, Arkansas Holiday Inn Airport September 25, 1212
    3. 3. Timber Income Tax• Instructor and Author (See Figure 1.1)• Educational materials• Course purpose is educational, rather than legal or accounting advice• If in doubt regarding validity of the materials, depend on the teaching notes which are current• Introductions -- please give name, firm, location, and one unrelated “fact” about yourself
    4. 4. Taxes – Some of Timberland Owner’s Greatest Expenses• Federal and state income taxes• Federal estate and gift taxes• Property and severance taxes• Sales tax• Excise taxes• Uncertainty of future tax levies
    5. 5. Overview of the Federal Income Tax• It is a tax on “net” gain, or profit• Investments in the your business or investment are offset against income in computing gain• Expenses to earn a profit are deducted in computing gain• Currently, capital gains taxed @ 0 and 15%• Ordinary income is taxed @ a max of 35%• Future is stable for 2 years; uncertain afterward
    6. 6. Federal Income Tax Process Chapter 1
    7. 7. Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312)• Extended most of 2001 and 2003 Act -- “Bush Tax Cuts” -- provisions through 2012• Extended other provisions that expired at the end of 2009, but it carries a price tag of $850 MMM• Bonus depreciation allowance extended to 100%• Sec. 179 expensing increased to $125 M in 2012 with the investment limit extended to $500,000
    8. 8. Income Tax: Administration• IRS is responsible for implementation the IRC – it interprets and enforces the statutes• IRS Regulations, both statutory and interpretive, are rules prescribed by the Service• Regulations have the force of law• Revenue Rulings cover specific fact situations, but have less force than regulations
    9. 9. Useful Tax Publications• Haney, H.L.,Jr. et al 2001. Forest Owners’ Guide to the Federal Income Tax. Ag. Handbook No. 718 – see also coop forestry website and note it has been revised and awaits IRS approval• Haney, H.L., Jr. et al 2005. Federal Income Tax on Timber: A Key to Your Most Frequently Asked Questions. R8-TP 34, U.S. Forest Service Cooperative Forestry• 2011 U.S. Master Tax Guide. CCH, Inc.
    10. 10. Other Resources• National Timber Tax website @ – funded by the U.S. Forest Service and originally maintained by Purdue University; has been transferred to UGA• The IRS Audit Manual• Hardwood Timber Industry Guide
    11. 11. Some Timber Tax Websites• USFS – (Cooperative Forestry, Washington, DC) and (Cooperative Forestry, Atlanta, GA)• IRS --• UGA --
    12. 12. Forest Activity ScheduleForm T (Timber) – Rev. Dec. 2005• Previous revision was October 2003• Form T now contains 5 Parts (Appendix A)• Part I – Acquisitions• Part II – Timber depletion• Part III – Profit or loss from land and timber sales• Part IV – Reforestation and TSI• Part V – Land ownership
    13. 13. Forestry Effects on Tax Planning• Effective tax accounting is essential for success with forestry investment returns• Keep in context of owner goals: – Financial, wildlife, aesthetics, recreation, sentimental• Economic returns are driven by: -- timber growth (inherent productivity) -- markets (stumpage prices) -- cost of capital (interest rates)
    14. 14. Timber Productivity• Yields depend on inherent site quality• Timber volumes are predictable for any species, site index, stocking, and age• Figure 1.3 shows yields for various sites of native loblolly pine stock in the south• Outputs are affected by investment in cultural practices – genetics, thinning, fertilizer, and vegetative control
    15. 15. Timber Markets Prices are Affected by Supply and Demand• Stumpage prices shown as averages for South in $ per ton from 4Q76 to 3Q10 -- Figure 1.4 – alternate (Source: Timber Mart-South)• Note differentials by product class• Short run prices are affected by weather, inventories, public policies, competition• Long run prices are affected by investment, technology, public policies, competition
    16. 16. South-wide Stumpage Prices 4th Quarter 1976 –3rd Quarter 2010 $50 $45 Pine Sawtimber $40 Pine Chip-n-Saw $35 Pine PulpwoodUS$ per ton $30 Hardwood Sawtimber $25 Hardwood Pulpwood $20 $15 $10 $5 $0 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009Source: Timber Mart-South TimberMart-South 18
    17. 17. Timber Value Growth• Financial returns based on physical growth, in-growth and quality measures• Physical growth as illustrated in Figure 1.3; it is the same as a constant price per unit (ton)• In-growth due to product differentiation with size – e.g., pulp to chip-n-saw to saw timber• Value appreciation is due to increasing size, quality, specification, volume, operability – see Effects of Thinning on Value Growth – Fig.1.5
    18. 18. Value ($)60005000 1- Thin4000 2- Thin 3- Thin3000200010000 0 5 10 15 20 25 30 35 40 Time (Years)
    19. 19. Cost of Capital• Generally, land owner’s alternative rate of return is a weighted cost of equity and debt (COC)• Opportunity costs include holding land, value of growing stock, and annual management costs• A simple capital decision rule: hold growing stock as long as annual percentage changes equals or exceeds landowner’s cost of capital or alternative rate (does not account for thinning $)
    20. 20. Real and Potential Values• Liquidation curve – current merchantable volume x timber price at any point -- real terms• Cost curve – establishment costs + annual costs are compounded to any year – potential terms• Income curve – expected harvest revenues - annual costs discounted to any year -- potential• Hybrid – solve for IRR and use as discount rate -- cost and income curves are the same
    21. 21. Timing of Harvest Decisions• Optimum harvest values occur at tangency of liquidation and cost curves – (i.e., marginal cost = marginal revenue)• A decision window occurs at + or - 3 to 5 years of an optimum rotation• Permits a focus on various goals – marketing, need for funds, personal objectives, value accumulation with minimum potential loss