The Federal Income Tax Update

1. The Federal Income TaxUpdate Dr. Linda Wang

2. A Tax Expert Who is the figure behind every great man, the individual who knows hisultimate secrets? A father confessor? Hell no, the tax expert. Louis Auchincloss

3. Timber SaleLong-term capital gain If you own your timber for more than 1 year, your sale are taxed at the beneficial long-term capital gain rate of maximum 15% (Sec. 631(b) or Sec. 1221)*, not the ordinary rate of maximum 35% * if you cut stumpage and get paid from the mill for delivered timber, only part of the payment you received is long-term capital gain, the difference between the FMV of timber and delivered timber price is taxed as ordinary income (Sec. 631(a))

4. Timber SaleFiling requirement Timber as investment: File Schedule D and Form T (may be required) Timber as business: File Form 4797, Schedule D, and Form T (may be required)* *Schedule C for Sec. 631(a) cutting

5. Form TFiling requirement • Form T is required if you: • Claim a cost/basis deduction (“depletion”) • Outright sale in timber business (Sec. 631(b)) • Cut stumpage and sell delivered product (Sec. 631(a)) * Exception: you are not required to file Form T if you only have an occasional sale of timber

6. Forest Planning CostTax Law Changes • Cost incurred in 2008 no longer use one-time 10% investment tax credit • The 10% investment tax credit was repealed in 2004 (by American Jobs Creation Act of 2004)

7. Forest Planning CostNew tax write-off rules • The new rules are: • Deduct the first $10,000 cost • Excess over $10,000 may be deducted (“amortized”) over 8-year

8. IRS Size The Size of the IRS In fiscal year 2006, the IRS employed almost 100,000 people and had a total budget of about $10 billions! Source: IRS website

9. Purchased TimberlandEstablishing Basis for Land and Timber • Basis is the cost of purchase, plus other acquisition costs such as survey, forester’s fee, and legal fees • You may deduct the basis from timber sale, reducing taxable income at sale • Basis for land and timber must be separately documented

10. Timber Casualty LossTax Deduction May be Limited • Casualty loss: if loss caused by sudden, unexpected and unusual forces such as fire or storms (hurricane, ice, wind…) • The amount of deduction is the lesser of: (1) the adjusted basis of timber or (2) the FMV loss

11. Timber Casualty LossTwo Key Points • Basis is for the entire property (not just the destructed portion) if one tax account is maintained for the entire property • Salvage sale may be tax-deferred if reinvested in forestry

12. Timber Casualty LossNew Audit Guide from the IRS • The IRS issued a new audit guide for timber casualty loss in September 2005 “Timber Casualty Loss Audit Techniques Guide” Verification of basis and FMV valuation of loss are two focal points of audit.

13. Bush 04 Return The Rich Learned to Have Money Work for Them President George W. Bush 2004 Tax Return Salary $397,065 Interests $363,483 $672,788 Total Taxes: $207,307 Refund: $38,534

14. Vice P. Cheney The Rich Learned to Have Money Work for Them Vice President Richard Cheney 2004 Tax Return Salary $425,584 Dividend $326,729 Business Income $533,197 Capital Gains: $222,463 Rental: $203,976 $1,734,373 Total Taxes: $393,518 Owe: $102,663

15. Teresa Heinz The Rich Learned to Have Money Work for Them Teresa Heinz 2003 Tax Return Salary $0 Tax-Exempt Interests $2,781,791 Dividends $2,216,280 Taxable Income $2,023,596 Total Taxes: $628,401 Refund: $247,933

16. Cost Share Payment ReceivedTwo Options • Generally the payment must be included in income • The expense may be deducted as part of the forest management costs

17. Cost Share Payment ReceivedQualified Program for Income Exclusions • However, qualified cost share payment may be excluded from income (Sec. 126) • Forest Land Enhancement Program (FLEP) • Conservation Reserve Program (CRP) • Environmental Quality Incentives Program (EQIP) • Wetland Reserve Program (WRP) • Wildlife Habitat Incentive Program (WHIP) • Forest Renewal Program (SC)

18. Cost Share Payment ReceivedExclusion Calculation • Last year you harvested 40 acres and received $84,500 for the timber. • This year, you replanted the 40 acres at a cost of $6,000 ($150/acre). • You received $3,900 in CRP cost-share payments to cover the cost of replanting. How much of $3,900 cost-share payment can be excluded from your gross income?

19. Cost Share Payment ReceivedExclusion Calculation • Step 1: • Compute 10% of the average annual income for the 3 previous years: • 0.10 x ($84,500/3) = $2,817 • Step 2: • Multiply $2.50 times the number of affected acres • $2.50 X 40 = $100

20. Cost Share Payment ReceivedExclusion Calculation • Step 3: Compare the two values: $2,817 is larger. Divide it by the interest rate: $2,817 / 7.56% = $36,823 • Step 4: $36,823 is larger than $3,900; you can exclude the entire FIP payment from your gross income.

21. New Tax Laws in 2007 Tax relief for business In May 2007, the first major tax law was enacted: • Mom and pop timber business have the option not being taxed as partnership

22. New Tax Laws in 2008 Tax Incentives for Business • Business owners may write off up to $250,000 for property purchased and placed in service in 2008 (“Sec. 179 Deduction”) • Deductions are reduced if investment is more than $800,000 • Bonus Depreciation: businesses may deduct 50% of the cost (“basis”) of property purchased and placed in service in 2008

23. Lump-Sum Timber Sale and Form 1099 New IRS Regulation Proposed • In November 2007, the IRS proposed to require Form 1099 reporting for lump-sum timber sale Effective date: after the final regulations adopted in the Federal Register Source: REG-155669-04

24. Books Reference Materials • Forest Landowners’ Guide to Federal Income Tax • National Timber Tax Website: www.timbertax.org • State Agency and Extension Websites • J.K. Lasser’s Your Income Tax • IRS Publication 17: Your Federal Income Tax

25. Rising Tax Code Complexity