Prospects in Federal Tax Legislation

by Cate Moore on June 16, 2014

CCFA has more than enough work to do keeping up with California state legislation, but that does not mean that the federal arena can be neglected.

There has been a lot of rumbling recently about reforming taxes.  Several of the forestry associations (Forest Landowners Association, American Forest Foundation) who do track federal legislation have been commenting on this and what it might mean to forest landowners and their businesses.

Current tax law provides the following tax provisions for  timberlands:

  • Deduct up to $10,000 per stand for reforestation costs, amortized over 7 years
  • Deduct the costs of forest management including fire, disease and pest prevention and treatment, thinning, fertilization, taxes, protection of wetlands and endangered species and infrastructure maintenance
  • Receive capital gains treatment  for timber harvest or sale of standing trees
  • Recover your basis if you own forest land for investment or business purposes and lose timber due to casualty, theft or condemnation

These provision address the unique nature of growing timber as a crop.  A tree planted today can take up to a century to reach maturity.  This sets it apart from all other businesses, where returns can begin to be realized within months for row crops and less than ten years for vineyards and orchards.  The normal capitalization process of extending costs through the entire development of the product would make it painfully difficult, if not impossible, for a timber grower to absorb his upfront costs.

The American Forest Foundation asked their members how they use the available tax breaks and incentives to remain economically viable and they report:

  • Tax incentives are used to maintain and improve their woodlands, including: maintaining roads and fire breaks, working with a forester, and thinning to improve forest health, replanting after harvest or wildfire to quickly restore habitat and reduce erosion
  • Capital gains treatment allows landowners to manage their land as a long term investment.  This gives them the means to put more into planting, thinning and infrastructure maintenance after a harvest.  Many report this is the make or break of whether investing in timber is worth the long term risk.
  • Until it expired, landowners were able to donate a conservation easement on their land as a tool to reduce pressures to develop their land for other uses.

With this in mind, let’s take a look at what Congress has been considering.

  • Eliminate the deduction for timber growing costs.  Current law allows $10,000 of the costs to be deducted in the year they are incurred, with the remainder amortized over seven years.  Can you manage capitalizing these costs over all the decades it takes your tree to grow from planting to maturity?
  • Eliminate the capital gains treatment for income from harvested timber.  Can you afford the burden of taxing your harvest as ordinary income in a single year?
  • Eliminate the deduction and amortization of reforestation costs.  Reforestation costs, whether after a harvest, a wildfire, a blow-down or an infestation, are a very large up-front investment expense that will not show returns for decades.  Can you afford to replant your land without these deductions and hang in for the decades it will take to gain your return on investment?

All of these factors of the forest business model need to be explained to your Congressional representatives, frequently, if we are to get a tax reform that won’t put us out of business.  Write your representatives and senators and explain your circumstances.  Remind them that you are the keepers of the habitat and the watersheds and that, to provide these services to the public, you need them to understand and accommodate what it takes to make your business work.  None of us want to see our forests become vineyards or housing developments, but we need their help to make it so.


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