Tax Reform Threatens to Eliminates Key Timber Tax Provisions

Family forest owners and stakeholders OPPOSE timber proposals included in tax reform legislation

The new Congressional leaders of the tax-writing committees have vowed to enact fundamental tax reform during the 114th Congress.  The way to pay for tax reform is being considered mainly through the elimination of tax expenditures.  Such eliminations would hit most industry groups hard, including forestry, where key timber tax expenditures are being targeted for repeal

The rational behind the elimination of the forestry tax expenditures is the belief that timber is inventory and not real property and therefore should not be treated as a capitol asset.  Timber Tax proposals under consideration include:

  • Deduction for timber growing costs. Current law allows forest landowners to deduct operating costs in the year that they are incurred, rather than capitalizing these costs over the decades – up to 80 years – it takes trees to reach maturity. (IRC Sections 162 and 263A(c)(5))
  • Timber revenue subject to capital gains. Since 1943, the Internal Revenue Code has recognized the long-term nature of timber investment and has treated proceeds from timber harvest and the sale of standing trees as capital gains. (Sections 1231(b)(2) and 631(a)&(b))
  • Deduction and amortization of reforestation. Reforestation involves significant up-front costs and is environmentally beneficial; thus current law allows all owners of working forests, including individuals, corporations, and partnerships, to deduct up to $10,000 of reforestation costs per stand as they are incurred and amortize the remaining costs over seven years. (IRC Section 194)

Family forest owners and stakeholders OPPOSE timber proposals included in any tax reform legislation.

  • Repeal of timber tax provisions would have a devastating impact on private landowners and rural communities.
  • The structure of taxes on forest-related income, forestland, and forest products can encourage or inhibit private investment in forest resource management.
  • Timber tax provisions constitute an important part of the operating environment for owners and managers of family forestland, and are a critical factor in determining the level of stewardship practiced and the types of products and services provided.
  • In financial analyses, taxes rank with harvest returns and rotation length as a key determinant of the viability of forest management investments.

Disruption to current timber tax provisions would result in disruption of the economy and environment, including:

  • A 15% decline in domestic sales totaling over $34 billion and the loss of 140,000 jobs.
  • Private working forests and the goods and services they produce contribute substantially to the economy with 2.4 million total industry-related jobs, payroll of more than $87 billion and $223 billion in timber and related wood products sales.

America’s working forests provide environmental benefits while maintaining value for their owners.

  • The number of private working forest acres has remained stable over the past 50 years while total timber volume has increased more than 50%, providing significant environmental value by consuming carbon dioxide, curtailing erosion, creating wildlife habitat, providing clean drinking water and maintaining natural lands for outdoor recreation.

Current law reflects the unique long-term investments of private forest owners.

  • Growing trees takes time and requires large amounts of investment capital as marketable trees take 20-80 years to reach maturity.
  • Substantial costs are incurred to plant the trees, maintain the forest (including fire prevention, road maintenance and pest control) and improve the growth and productivity of the trees.
  • Forest owners invest significantly in forest replanting, fertilizing, thinning and other management activities, preventative measures (fire, pest and disease), research, environmental protections and set-asides for wetlands, protected species and other purposes, and the payment of taxes and interest.
  • Growing trees is mostly uninsurable and high-risk as fire, pests, disease and other natural disturbances destroy tens of thousands of acres of private forest annually.

Background

Congress has long recognized that growing forests have unique economic attributes that do not necessarily match easily with general tax principles. It can take between 20 and 80 years before a forest stand is harvestable. This investment in forests ties up large amounts of capital in the land, but the forest owner must also bear substantial annual costs to maintain the forest (including fire prevention, road maintenance and pest control) to improve the growth and productivity of the trees. Additional costs are incurred for replanting after harvest as well as for environmental protections and set-asides for wetlands, protected species and other significant resources. Moreover, healthy forests provide significant societal value by consuming carbon dioxide, curtailing erosion, creating wildlife habitat, sourcing drinking water and maintaining natural open space for human recreation for which the forest owner receives little or no compensation.

In response, Congress crafted specific provisions in the Internal Revenue Code to reflect this unique economic framework and challenge. These provisions allow all forest owners, whatever their size to:

  • Deduct the costs of forest management, including prevention measures (fire, pest and disease), thinning, fertilization, interest, taxes, protection of wetlands and endangered species, and forestry activities. (Sections 162 and 263A(c)(5));
  • Receive capital gains treatment for the harvest of timber or sales of standing trees. (Sections 1231(b)(2) and 631(a)&(b)); and
  • Deduct up to $10,000 of reforestation costs per stand, with the remainder amortized over 7 years. (Section 194). These timber tax provisions have provided long-term, stable returns for the many individuals who directly or through pension funds rely on their forestland investment for retirement and other needs. At the same time, these timber tax provisions have well served the nation, consumers and manufacturers, forest owners and the environment. Overall, the forest products industry sustains over 2 million direct, indirect, and induced jobs nationwide.

These provisions have worked so well that since the 1950’s timber volume has increased by about 50% on approximately the same amount of forested acres. Two-thirds of that increase has occurred on private forestland. Letters to Congress (create links for viewing pdfs)