By Johathan Dingler
Journal Correspondent

There will be a few tax changes in store for timber landowners in the Piney Woods region for 2005. That's because on October 22, 2004, President Bush signed into law the American Jobs Creation Act of 2004.

Under provisions of this law, private timber landowners who actively manage timber as a business will be allowed to pay capital gains taxes of five percent for lump-sum timber sales. Previously, timber sales for business filers were subject to ordinary tax rates of 15 percent unless the sale was structured using a "pay as cut" method.

Lump sum timber sales are often found to be more desirable for landowners. Under this method, timber is appraised, and bids are placed for the sale. Landowners then usually receive payment when the contract is signed, or shortly after. Under the "pay as cut" system landowners only receive payment after stumpage has been hauled away and weighed. Therefore, lump sum timber sales can reduce the necessity to closely monitor the amount of timber harvested because it's already been paid for.

For landowners who hold timber as investment, the capital gains treatment has always been available irrespective of timber sale, irrespective of timber sale methods. The new provision only affects those who actively manage timber as a business.

The capital gain treatment on lump-sum sales from timber business will not only afford landowners the lower tax rate, but will also save landowners additional money in terms of self-employment taxes. This is because capital gains are not subject to self-employment rates while ordinary income is.

This provision of the bill will only apply to timber harvested after December 31, 2004. Any harvests prior to that date will fall under the previous laws. There is another provision to this bill, however, that might affect landowners for the 2004 tax year.

Reforestation costs of the first $10,000 incurred after October 22, 2004, will under the new law be immediately deductible with all of the remaining costs deductible over an 84 month period. Previously, expenditures over $10,000 could not be deducted until the time of the subsequent timber sale. The new provision greatly accelerates the reforestation deduction.

Efforts by lobbyists to change the timber tax laws have been underway for over a decade. Forest Landowners Tax Council board member Henry Barclay stated that "whether we know it or not, this may be the most significant timber tax legislation for non-industrial private landowners in our lifetime."

For more information on timber taxes, access the National Timber Tax website from the link on The Piney Woods Journal homepage at www.thepineywoods.com/facts.htm

Back