Introduction to Taxes
Basic Types of Taxes
•
•
•
•
•
•
Property – ad valorem
Death - ad valorem
Income – salary, wages, profits, etc.
Sales – price paid
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
– Wages, salary, business profits
– Gains from disposal of assets
• Sale price minus amount paid for it
• Timber depletion very complicated
Sales Tax
• Types
– Federal
• Pittman-Robertson tax on ammunition, etc.
• On-road fuel
• Alcohol
– State
– Local – county, city
• Basis
– Sales price
Employment Taxes
• Workers comp
• Unemployment
– State
– Federal Unemployment Tax Act (FUTA)
• Federal Insurance Contributions Act
(FICA), aka, social security
• Medicare – hospital
Paying $1 of wages requires paying $0.35 to $0.50 in taxes
Other Taxes
• License fees
– Registered forester, logger
– Vehicles
• Excise
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
• Gift – grantor basis carries over
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 – Depletion allowance
• $55,000 revenue - $30,000 depl. allowance =
$15,000 taxable gain
• Warn client that timber sale revenue is
taxable even though they don’t get an IRS
Form 1099.
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