Forest Landowners' Guide to the Federal Income Tax

Abstract

This publication is the latest in a series of income tax handbooks for nonindustrial private forest owners that extends back over 45 years. It represents a major revision of Agriculture Handbook No. 708, Forest Owners' Guide to the Federal Income Tax. It updates that publication to include tax legislation passed after 1994 and administrative changes promulgated through 2000.

The primary purpose of this handbook is to foster good forest management by combining, in one source, relevant information for analyzing investments in forest management and an explanation of the Federal income tax law associated with those investments. It does not provide guidance on establishing or managing forest stands; that type of information is available from State agency foresters, State Cooperative Extension foresters, private forestry consultants, and industry foresters.

It is important to note that the handbook authors are foresters and use terms in their conventional forestry sense, not their accounting sense. An example is timber stand improvement (TSI), a term for the practices used to improve the composition or condition of an established timber stand. Although its name includes the word "improvement" TSI typically is not an improvement in the accounting sense, the cost of which must be capitalized. Rather, it is an ordinary and necessary forest management practice and its cost may be deducted (expensed) in the year it is incurred.

Provisions of two of the most recent tax acts, the Taxpayer Relief Act of 1997 and the Internal Revenue Service Restructuring and Reform Act of 1998, affect taxes on income from timber sales. The 1997 act reintroduced the concept of preferential treatment for long-term capital gains that was eliminated by the Tax Reform Act of 1986. It also increased the holding period to qualify for long-term capital gain treatment, created a new category of "mid-term" capital gains, and provided for a further reduction in the capital gains tax for assets held five years beyond December 31, 2000. The 1998 act returned the holding period for long-term capital gain treatment to 12 months.

As a result of the interaction between the two acts, for timber sold after May 6, 1997, the tax rate on long-term capital gains declined from 28 percent to 20 percent—or from 15 percent to 10 percent for amounts in the lowest bracket. For timber sold between July 28 and December 31, 1997, the holding period to qualify for long-term capital gain treatment increased from 12 to 18 months, with "mid-term" capital gains from timber held between 12 and 18 months taxed at 28 percent. The holding period returned to 12 months for timber sold after December 31, 1997. For timber held 5 years beyond December 31, 2000, the capital gain tax rate is scheduled to decrease another 2 percent, from 20 percent to 18 percent or from 10 percent to 8 percent for amounts in the lowest bracket.

Citation

Haney, Harry L., Jr.; Hoover, William L.; Siegel, William C.; Greene, John L. 2001. Forest Landowners'' Guide to the Federal Income Tax. Agriculture Handbook 718. Washington, DC: U.S. Department of Agriculture.