Introduction to Taxes
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.
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
Impact of Ad Valorem Tax on Timber
Annual Property Tax Due
Land – increase $50 per year
Assessed value – 10% of market value
Timber – increase 6% per year
Milage – 100, i.e. 1%
$30
Initial value
of land -$1,500
$25
Land & Timber
$15
$10
Land Only
$5
$0
20
07
20
10
20
13
20
16
20
19
20
22
20
25
20
28
20
31
20
34
20
37
20
40
20
43
20
46
Initial
value of
timber -$2,100
$ per Acre
$20
Year
Death Taxes
• Types
– Federal
• estate
• gift
– State
• estate
• Inheritance
• Basis for tax – ad valorem
– Requires land and timber appraisal
Income Taxes
• Types
– Federal
– State
– Local
• Basis
– Earned income - Wages, salary, business profits
– Gains from disposal of assets
• Sale price minus amount paid for it (basis)
• Depletion
– Percentage – oil, gas, minerals
– Cost - timber
Sales Tax
• Types
– Federal
•
•
•
•
Pittman-Robertson tax on ammunition, etc.
Duck stamps
On-road fuel
Alcohol
– State – some purchases exempt
– Local – county, city
• Basis
– Sales price
Employment Taxes
• Workmen’s compensation – form of
insurance for on-the-job injuries
• Rates for Washington (per hour worked)
Occupation
Cost/Hour
Worked
Assumed
Wage
Cost/$ of Wage
Sawmill
$2.2059
$15
$0.15
Shake &
Shingle Mill
$18.6181
$15
$1.24
Logging
$18.5627
$15
$1.23
Pulp &
Paper Mill
$1.1502
$20
$0.06
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
Employment Taxes
• Federal Insurance Contributions Act
(FICA), aka, social security
– Employer pays 6.2%
– Employee pays 6.2%
– Capped at $113,700 in 2013
• Medicare – hospital
– Employer and employee – 1.45% each
• If wages > $200,000 employee’s rate – 2.35%
– No cap
Employment Taxes - Summary
• Assume a logging employee earning
$40,000
Low
High
Workman’s Comp $30,000
$49,200
FUTA
$ 2,400
$ 3,345
FICA
$ 2,480
$ 2,480
Medicare
$
$
Total
$35,460
580
580
$55,605
Other Taxes
• License fees
– Registered forester, logger
– Vehicles
– Hunting
– Fishing
• Excise
– Import tariffs
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”)
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
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
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. Timber buyers are now required
to report purchases on 1099-S.
• 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”
• If not treated as capital gain it’s ordinary
income
– Base rate is 10% to 39.6%,
• Plus self-employment tax of 15.3%
• Plus 3.8% if net investment income >$125,000
single, or $250,000 joint
• Max rate of 58.7%
Capital Gains Tax Rates
• If owned more than 1 year it’s long-term
capital gain on Form 1040, Schedule D
– Taxed at
•
•
•
•
0% for 10% to 15% brackets,
15% for 25%, 28%, 33%, or 35% brackets,
20% for 39.6% bracket
Plus 3.8% on net investment income if adjusted
gross income (AGI) > $125,000 single, or
$250,000 joint