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4/24/2018 » 4/25/2018
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6/26/2018 » 6/29/2018
2018 National Conference of Private Forest Landowners

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2019 National Conference of Private Forest Landowners


Harry Haney: "Breaking Down the Tax Act
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Breaking Down the Tax Act

The Trump administration has delivered tax reform, along with regulatory relief, that helps private forest landowners. But the long-term effects on the timber business remain unclear.

By Harry Haney

Editor’s Note: FLA provides this opportunity to consider income, and estate and gift tax issues that affect your timberland. Treat the discussion as educational advice for improving your understanding of the tax law and for enhancing communication with your attorney or tax advisor. Your advisors are familiar with the facts and circumstances in your specific case and can provide legal and tax advice as appropriate.

 A worried family tree famer notes that, “We have experienced a discouraging decade with our forest land. Markets disappeared for timber products and soft prices affect the remainder. Regulations, imposed and proposed, impeded efforts to manage efficiently. The Trump administration delivered tax reform and regulatory relief; however, it remains unclear how this affects our timber business. We expected estate tax repeal spending considerable energy on leaving the timber in good condition for the children. Have our efforts been wasted?”

 The landowner’s concerns cover lots of ground, but first a quick review of the estate tax, and then impressions on how the revised income tax structure impacts forestry investments is covered. FLA Vice President Melina Gable provided a summary of the Tax Cuts compiled by the Family Business Coalition.

 The Tax Act (Tax Cuts and Jobs Act of 2017) legislation doubled the estate, gift, and GST exemptions to $11.2 million per individual and $22.4 per couple with portability. All three taxes became effective on January 1, 2018, and they will be indexed for inflation. 

 It will be informative to see if forestry specific estate planning tools for special use and deferral and extension survived tax reform. In the meantime, do you have a current will? In the absence of a will a high priority should be working with a qualified attorney to plan disposition of property in accordance with your goals. Dying intestate without a valid will allows the state to distribute assets as specified by state law. Under most circumstances your plan will be superior to that of the state. For example, a valid will permits naming an executor, saving expenses by waiving bond and avoiding other expenses. A guardian can be named for minors, charitable bequests can be made and certain assets can be included in a trust created for disabled family members. Even with a will, uncertainties in markets, future taxes and family circumstance warrant a periodic review with changes in any of the above factors. A will remains a sound investment whether the estate is taxable or not.

The 100-plus year old estate tax initially levied to help finance World War I evolved into liberal public efforts to limit concentrations of wealth. The death tax has been widely reviled for disrupting family farms and timber businesses. It is considered unfair since estate assets already have been subjected to income tax. Although increased exemptions limit taxable estates to a relatively small percentage of estates, considerable legal and accounting expense will be expended to avoid paying estate tax. 

Perhaps its greatest cost is uncertainty and inefficiency expended in avoidance, or tragic consequences for the unprepared. Although the Trump administration and members of Congress had publicly expressed support for repealing the tax, the federal bureaucracy’s voracious appetite for revenue once again prevailed.

Corporate Taxation

The Tax Act will lower tax rates on corporations, pass-through entities, individuals, and estates. It will offset some of the cost of that tax relief by limiting or eliminating many current-law deductions, credits, and incentives for businesses and individuals. The balance between lower rates and offsets, estimated to be roughly $1.45 trillion, will be added to the federal deficit (House Ways and Means Committee Report, Tax News & Views December 15, 2017).

Of course, this estimate fails to fully account for dynamic expected growth in the economy and employment due to the rate deductions. Investment of tax saving should increase employment with added tax revenue expected to result. This is one of the items that should be followed in the coming months. Some key provisions in the conference agreement are briefly noted below that may affect forest landowners. This information is from preliminary committee reports that must be verified when the final Tax Act language is published. 

The corporate rate is a flat 21 percent rate effective in 2018. The corporate alternative minimum tax (AMT) is repealed in the House version, but maintained in the Senate. Watch for the resolution in the final bill. With expensing, items that are amortized under previous law can be fully expensed in the year placed in service through 2022, with a phase-out of that benefit thereafter. 

The bill allows expensing for either new or used property. Tax free like-kind exchanges will be disallowed except for real property. Business interest is generally limited to 30 percent of a corporation’s income through 2021. Unused deductions can be carried forward indefinitely; however, separate rules apply to partnership owners. Net operating losses (NOLs) face new restrictions in tax years after 2017. They may only be carried forward, not backward, and may only be used to offset up to 80 percent of taxable income. This brief and incomplete listing shows that tax statutes for corporations may be shorter, but no less complicated for accounting and reporting purposes.

Individual Tax

All individual tax changes expire after 2025. That is, due to Congressional rules the tax changes are temporary. It is remarkable that this financial framework works at all for forestry and agriculture since they are long-term investments by definition. Nevertheless, the Tax Act maintains seven individual income tax brackets. For single filers the 10 percent bracket begins on taxable income up to $9,525. Other brackets that follow are 12-percnt, 22-percent, 24-percent, 32-percent, 35-percent and 37-percent on taxable income over $500,000. 

For married couples, the 10-percent bracket begin on taxable income up to $19,050; and the 37-percent bracket begins on taxable income on amounts above $600,000. Thus, this structure provides a built-in marriage penalty. 

The standard deduction is effectively doubled and personal exemptions are repealed as well as the Pease limitation on itemized deductions. 

The Tax Act retains the pesky alternative minimum tax (AMT). It has higher exemption amounts proportionally than the previous AMT. The AMT is most likely to be triggered when there spikes in income due to unbudgeted timber sales or other unusual infusion of cash. The counter to imposition of the AMT is planning for relatively even streams of cash flow. This is facilitated by harvest scheduling in the management plan for controlling the income from harvest sales and thinnings and balancing the expenditure of investments in reforestation, timber stand improvement and infrastructure.

 Mortgage interest deductions face limitations on allowable indebtedness for new mortgages of $750,000. The House bill is somewhat less, which requires attention to planning investments in order to take advantage of the deduction.

 Capital Gains on the sale of a primary residence is maintained at the current-law exclusion.

 Forestry specific treatment of expenses, credits and payments: There are any number of questions as to how forest management expenses will be handled within each form of ownership -- individuals, partnerships, other pass-throughs and corporations. These include cost-share payments for a variety of federal and state programs. Are there provisions for smoothing income, e.g., income averaging?  Real property exchanges seem to be allowed, but under what set of rules? Casualties and involuntary conversions also have some intriguing questions, especially as the costs of reforestation are expensed leaving most timber stands fully appreciated. As is frequently the case, “the devil is in the details.”

 As the Tax Cuts and Jobs Act of 2017 is published and the rules and regulations become clearer we will get a better explanation of how forest land ownership will fare in the future. One thing seems clear for landowners – lots of changes are in the offing. 

 Wasted Effort? A fresh response to the question depends on the weight put on financial returns compared to more esoteric values. Consider Peter Wohlleben’s book The Hidden life of Trees, reviewed in the January/February 2018 issue of Forest Landowner. This New York Times bestseller provides a fascinating way to think about how forests and humans fit into the broader scheme of things. It is both entertaining and challenging. Should the business plan of planting trees with the expectation that our families will find the forest in better condition than we found it be modified?

Harry Haney is a consulting forester and the Garland Gray Emeritus Professor of Forestry at Virginia Tech. He can be reached at

Additional References

Federal Income Tax on Timber: A Quick Guide for Woodland Owners, (2012) USDA Forest Service FS-1007 has been updated by Linda Wang.

The Forest Landowners Guide to the Federal Income Tax (2013), Ag. Handbook No. 731 is available from USDA Forest Service.

Estate Planning for Forest Landowners: What Will Become of Your Timberland? 2009. Gen. Tech. Rep. SRS-112, Asheville, NC: USDA Forest Service, Southern Research Station, 180 p. is a useful guide for estate planning.

For additional information about timber tax questions, or upcoming programs, contact the Forest Landowner Association.








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