Economics of Tree Farming - Oregon State University Extension
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Transcript Economics of Tree Farming - Oregon State University Extension
Clint Bentz, CPA, CMA, MWM
Boldt, Carlisle & Smith, LLC
(541) 928-6500
[email protected]
Overview
What is Return on Investment?
Financial and non-financial returns
Accounting for your woodland
Income & Estate tax issues
Property tax programs
Putting it all together to compute financial ROI
Your family’s ROI
What is Return on Investment?
Payback period: No. of years to return your money
Net Present Value: How much you will earn in today’s
dollars over your target earnings rate
Internal Rate of Return: Your earnings (interest) rate
over the life of the investment
Pre-or post tax calculation
Effect of inflation
Creating a model allows you to determine if certain
investments pay off
Financial & Non-financial ROI
Top 10 reasons for owning family forests (2008 USFS survey):
Enjoy beauty or scenery
Family heritage
Privacy
Nature protection
Connected to home or cabin
Investment (6)
Hunting or fishing
Part of farm or ranch
Hiking, snowmobiling, and other recreation
Timber production (10)
What is Highest & Best Use?
Timber production?
Recreation?
Retreat?
Development?
Begin with the end in mind! (Steven Covey)
An Intergenerational Affair
Planting
Harvest
1st Generation
2nd Generation
3rd Generation
4th Generation
5th Generation
1909 FORD Model T
The Year 1909
Average Life Expectancy: 47 years
14% of homes had a bathtub
8% of homes had a telephone
Model T invented – factory open in 1910
Only 8,000 cars and 144 miles of paved roads in the
US.
Tallest structure: Eiffel Tower @ 990’
Average wage: 22 cents/hour
Average annual wage: $200-$400/yr
No income tax, gas tax, or sales tax
Over 95% of births were at home
90% of doctors had no college degree
Women washed hair once/month
Five leading causes of death (in order):
Pneumonia & influenza
Tuberculosis
Diarrhea
Heart Disease
Stroke
American flag had 45 stars
230 reported murders in the USA
Population of Las Vegas, NV: 30
6% of Americans graduated from HS
20% of Americans illiterate
No crossword puzzles, canned beer or ice tea (not
invented yet)
No Mothers or Fathers Day
Cutting edge technology: Steam!
1910 Census – Percentage of Rural Households by State – Nat’l 53.85%
The Year 1910 vs. 2010
US Population: 92million vs. 310m
% living in rural: 54% vs. 16%
Number in rural: 50m vs. 50m
2.5m farms, 10m woodland, 37.5m other
2012 Pew Research Study
53% of 18-24 year olds living with parents
29% of 25-34 year olds living with parents
Highest % of multi-gen households since 1950’s
What will the world be like in 2110?
NEED TO STAY FLEXIBLE
Pass on values and passion!
Accounting for your Woodland
Cost Basis of Land, Timber & Improvements
Original purchase price allocated pro-rata
Additional capital improvements and acquisitions
Accumulated depletion & depreciation
Annual income and expenses
Check register
Double entry accounting (debits = credits)
Tax accounting and budgeting/planning purposes
Timber growth and yield
Income Tax Issues
Depletion
Computing taxes on sale of timber
Passive Loss rules
Reforestation
Harvest & Privilege Tax
Depletion
Recovery of cost basis in timber
Pro – rata over all components of value
Example of Allocation ($350,000 purchase price):
Assets Acquired
Individual Value Percent of Total
Allocated Basis
Land
20,000
5%
17,500
Timber
200,000
50%
175,000
Residence
140,000
35%
122,500
Barn
20,000
5%
17,500
Reproduction
20,000
5%
17,500
Total
400,000
100%
350,000
Depletion
Computed over all timber now standing
Deduction computation example:
Original basis allocated to timber $175,000
Timber standing before harvest 300 MBF
Timber harvested during year 200 MBF or 67%
Depletion deduction = $175,000 x 67% = $117,250
Remaining basis = $200,000 - $117,250 = $57,750
631(a) Election
TIMBER OWNER
LOG SELLER
Stumpage value at Jan 1
Gross receipts less
of harvested timber
Less depletion deduction
Net is Section 1231 capital
gain from sale of
business property
Stumpage (COGS)
Less operating costs
Net is Ordinary income
(loss)
631(a) Election
1231 Gain reported on 4797 transferred to Schedule D
Ordinary income on Schedule C
Recognize 631(a) gain in year timber is severed and
measured.
Must make election (Form T) on timely filed return
Election is irrevocable.
631(a) Computation
$200,000 gross proceeds from mill
$150,000 “631(a) Value” (determined by appraisal)
$117,500 depletion deduction
$70,000 logging, hauling & operating costs
Taxable income = $200,000 - $117,500 - $70,000 = $12,500
Schedule C
Gross Sales
200,000
Sec 631(a) Cost/Gain
(150,000)
Depletion (cost basis)
Form 4797
$150,000
(117,500)
Logging & operating costs
(70,000)
Taxable Income
(20,000)
32,500
Passive Loss Rules (1986 Tax Act)
60-100 years of losses, 1-5 years of income in business
cycle.
“Safe Harbor”: Income three years out of five.
Three types of income:
Active (wages, material participation business)
Portfolio (interest, dividends, capital gains)
Passive (rents, passive business)
Losses from passive activities don’t offset other income
Material participation is based on hours spent in the
activity. Burden of proof is on the taxpayer. Assertion
on tax return.
7 Material Participation Rules
1.
2.
3.
4.
5.
6.
7.
500 hour rule.
Less than 100 hour rule.
Between 100 and 500 hour rule.
Multiple businesses rule (between 100-500 hrs).
Five of last 10 years rule.
Facts and circumstances rule.
Personal service activity – N/A.
Material Participation Rules
Taxpayer and spouse time counts twice
Interplay with 100-500 hour test
Surviving spouse needs to meet “active management
test” if farm
Retired or disabled OK if material participant for 5 of
8 years preceding retirement/disability if farm
Don’t have to meet same test each year
Based on facts and circumstances – be careful!
Need to keep a record of your hours!
Reforestation
Reforestation costs are capital costs, not available for
depletion until first commercial entry
Covers all costs to establish a forest (see Forest
Practices Act for definition)
Can elect to deduct up to $10,000 per year per
Qualified Timber Property (on Form T)
Can elect to amortize (Sec 194) amounts over $10,000
per calendar year for 7 yrs (with half year convention).
Reforestation
Cost share payments included in income
ACP, FIP, ACP, EQIP pmts can be offset against costs
based on formula
State tax credit of 50% for conversion of
underproductive lands. Program sunsets 12/31/2011.
Discuss proposed project with stewardship forester first
Site prep & planting done in 2011
Limited to commercial forestland not meeting
minimum stocking requirements under FPA
Harvest Tax
Harvest tax levied on timber harvested on all land in
Oregon.
Due by January 31. Pay by 12/31 to deduct.
If expect to owe $1,500 or more, must pay estimates.
First 25 MBF harvested annually exempt
Convert tons to MBF
Loads where <10% of logs are 8” or larger divide tons/11
Loads where 10%+ are 8” or larger divide tons/7.5
Chips from dead trees divide tons/5
Chips from green trees divide tons/11
Rate for 2011 and 2012 is $3.575 per MBF
Small Tract Forestland Program
STF initiated in 2004.
Land assessed at 20% of forestland value.
Apply with county assessor by April 1
Must own at least 10 acres and less than 5,000 acres
Must put entire tax lot and contiguous tax lots into
program. Includes lands owned as individual and
through entity ownership where you have majority
interest.
2011 severance tax rates: WO $4.74/mbf, EO $3.70/mbf
10 year lookback/recapture if leave program
Forest Resource Trust
Reforestation assistance program
Loan, not a grant – up to 100% financing, up to
$100,000, secured by trees planted
No harvest requirement, paid back at harvest as
percentage of net proceeds.
Catastrophic events and law changes preventing
harvest cancel contract.
Estate Tax
Federal Exemption 2011, 2012 = $5 million + 35%
Federal lifetime gift & GST exclusion also $5 million
Oregon law changed in 2012:
True exemption of $1 million
Tax rates from 10-16%
Three year statute of limitations
Revised Oregon Natural Resource Credit
NRP must be 50% of estate, total estate < $15 million
NRP includes farm, forestry & fishing business
NRP includes up to additional 15% in cash
Annual reporting for dispositions & replacements, 5 years
Computing ROI
See Excel Model
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4
8
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Family
Csn
Owners
Csn
Uncle
Mom
Csn
Wife
Dtr
Csn
Aunt GM
Dad
GD
Son
Mgr
Emp
Emp
Employees
Outlaw
HEIRLOOM SCALE
1
5
Where are you today on this scale?
Why? (There is no “right” answer)
10
Family – Business Continuum
Business as social
welfare program for
the family
What is good for the
business is good for the
family
Family most important,
business must serve
needs of the family
Business most important,
family must serve needs of
the business
TRUE ROI
Growing timber is an intergenerational exercise
Sharing Passion and Vision with the next generation
Identify financial and non-financial values
Create intergenerational ownership structure
Create intergenerational family structure
Communicate! Avoid the bear trap syndrome!