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Congress's New Tax Bill Would Help Tree Farmers

Tree Farmer Magazine: November/December 1999 - Volume 18, No. 6

For the first time in over a decade a tax bill with timber specific provisions was passed by Congress, H.R. 2488, "Taxpayer Refund and Relief Act of 1999." Your representatives in Washington, D.C. did a miraculous job of getting the message to Congress that tree farmers deserve fair tax treatment because you provide a valuable service by growing timber, providing wildlife habitat, scenic views, high quality water, and many other benefits.

By the time you read this President Clinton will have vetoed the bill and, I hope, Congress and the Whitehouse will be working on a bill that he will sign. The challenge will be to retain in the compromise bill the provisions vital to our interests.

Here's a very quick overview of the timber-related provisions included in the bill that went to the Whitehouse in September.

Capital Gains Reduction and Simplification

Individual capital gains would be reduced from 10 and 20 percent to 8 and 18 percent for sales and other disposals after December 31, 1998. Individual taxpayers could index for inflation the basis of assets acquired after 1999. Indexing would be based on the price index for the Gross Domestic Product measure of economic activity.

If you own timber considered to be "held primarily for sale to customers in the ordinary course of a trade or business," you must dispose of your timber with an economic interest retained to qualify for capital gains treatment. The usual way to retain an economic interest is to use a "pay-as-cut" contract. You can't sell it under a lump some contract, even though this may be the best way to maximize your income and assure payment. The bill would allow the owner of the land that the timber is growing on to qualify for capital gains with a lump sum contract. Restriction to the landowner only is somewhat limiting, but certainly a major improvement.

Reforestation Credit and Amortization

The amount of reforestation expenditure that qualifies for the 10- percent reforestation credit would increase from the current limit of $10,000 per year to $25,000 per year. The amount qualifying for the eight-year amortization deduction is also currently $10,000 per year. The bill provides that an unlimited amount of qualified expenditures could be amortized for the years 2000 to 2003. Thereafter the $25,000 limit would apply to both the amortization deduction and tax credit. This rollback to the $25,000 limit was included because of problems finding the off-setting revenue increase to cover the reduction in tax revenue from no limit on the amortization deduction.

Section 179 Expensing

Tree Farmers with sufficient business income can elect under Section 179 to expense, rather than depreciate, the cost of equipment and similar capital investments. The limit would be increased from $10,000 to $30,000 per year.

Estate Tax

Estate, gift, and generation-skipping transfer taxes would be reduced until fully repealed in 2009. After 2009 a carryover basis system would be phased in for transfers of assets from "large" estates. The first $3 million of transfers to surviving spouses would receive a step up in basis, however.

The tax bill expanded the number of properties eligible for the additional estate tax deduction for qualified conservation easements by increasing the distance limit. Currently the land must be within 25 miles of a metropolitan area, national park, or wilderness area, or within 10 miles of an Urban National Forest. These limits would be increased to 50 and 25 miles, respectively.

Other Provisions

The alternative minimum tax on individuals would be phased out. Farmers are currently the only types of taxpayers who can use income averaging. The bill would extend this benefit to fishermen. It also provides that income averaging would not increase a farmer's or fisherman's alternative minimum tax. However, the definition of farming still excludes the production of timber.

Further Update on Casualty Loss Procedures

In the last issue I discussed changes in how the Internal Revenue Code is applied to casualty losses on timber. I noted the risk associated with using the procedure allowed by the courts for several large corporate timber growers. This was because the IRS has not formally agreed to follow the case law.

There is now a strong indication from the IRS that they will not disagree with taxpayers who use the procedure in a manner that is consistent with the way in which they maintain their timber depletion accounts. Thus, the "single identifiable property" used to determine the basis of the timber lost can be the basis of all the timber included in the depletion account, instead of the basis of the individual unit of measure – board feet, cords, etc. The net result of the change is to increase the likelihood that the fair market value of the timber destroyed, not its basis, will be the amount of the casualty loss allowed. However, the IRS indicates that they will look very carefully at how you determine the volume and fair market value of timber actually destroyed. Remember that only timber destroyed is subject to the casualty loss deduction. No loss can be attributed to a reduction in current or future growth due to damage from the event causing the casualty loss.

We'll keep you updated on the website: http://www.timbertax.org

The following article has been reproduced here from the "Tree Farmer" magazine with the permission of the American Forest Foundation, 1111 19th Street, N.W., Suite 780, Washington, D.C. 20036. (Telephone 202.463.2462)