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