Economics of Tree Farming - Oregon State University Extension

Report
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
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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):
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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
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$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
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 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
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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
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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
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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
2
4
8
16
32
64
126
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!

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