Presentation Transcript

1. Introduction to Taxes

2. 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.
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 Federal estate gift State estate Inheritance Basis for tax – ad valorem Requires land and timber appraisal
6. 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
7. 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
8. Employment Taxes Workmen’s compensation – form of insurance for on-the-job injuries Rates for Washington (per hour worked)
9. 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
10. 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
11. Employment Taxes - Summary Assume a logging employee earning $40,000
12. Other Taxes License fees Registered forester, logger Vehicles Hunting Fishing Excise Import tariffs
13. 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”)
14. 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
15. 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
16. 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.
17. 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