Preserving Timberland Tax Provisions to Keep Working Forests Viable
The timberland tax provisions help sustain private forests in the U.S.
Four private forestry provisions, commonly referred to as the "timberland tax" provisions, help maintain the economic viability of 450 million acres of private forests owned and managed by more than 22 million forest owners, including individuals, families, institutional investors and businesses.
- Capital gains treatment of timber revenue. Since 1943, the tax Code has treated proceeds from timber harvest and the sale of standing trees as capital gains to promote the economic and other public benefits of forest retention. (IRC Sections 1231(b)(2) and 631(a)&(b)) Treating timber revenue as long-term capital gain helps provide a return on investment to compensate for long-term risk. It also promotes forest retention by removing pressure to convert timberland to other uses that generate ordinary income more quickly with less risk.
- 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. (IRC Sections 162 and 263A(c)(5)). Allowing forest owners to currently deduct timber growing costs enables them to afford forest health treatments that reduce the risk of natural disturbance and makes practices such as road maintenance, research, interest expense, taxes and protecting wetlands and wildlife habitat affordable through the duration of the long growing cycle. Forests are mostly uninsurable, requiring forest owners to bear for long periods the significant risk of destruction by fire, pests, disease and other natural disturbances.
- Treatment of timberland as real property for purposes of the real estate investment trust (REIT) rules. REITs are a common ownership form chosen by many current forest owners and investors. (IRC Sections 856 through 859). Treating private forests as real property reflects the significant long-term capital investment made by forest owners to produce marketable trees that take 20-80 years to mature. Trees are different from inventory, because they are held for decades rather than days or months, and they appreciate rather than depreciate in value.
- Deduction and amortization of reforestation costs. The Code allows forest owners to deduct up to $10,000 of reforestation costs per stand as they are incurred and amortize the remaining costs over 7 years. (IRC Section 194). The separate deduction for tree planting recognizes the need for long-term investment in forest management and encourages the retention of the economic and public benefits from retaining land in forests.
Repealing the timberland tax provisions would have a significant negative impact on jobs, the economy and the environment.
The timberland tax provisions in the current tax code treat private forest ownership as a long-term investment in real property and address in a practical way the economic realities of maintaining the health and productivity of these forests over time. An analysis shows that eliminating these provisions would result in:
- Economic Loss. Repeal would cause a 15% decline in domestic sales totaling as much as $34 billion annually and the loss of up to 140,000 jobs.
- Reduced Federal Tax Revenue. Repeal would reduce federal tax revenue from the forestry sector through systemic changes in the industry, including business restructuring, selling or converting timberlands to other uses; reductions in timberland productivity; declines in manufacturing; job loss and shifting investments to timberland outside the United States.
- Tax Increase for Private Forest Owners. Most private forests are owned by individuals and entities that pay one level of tax and are unaffected by changes to the corporate tax rate. By imposing new additional costs driven by the tax code, repeal of the timber tax provisions results in an effective tax increase for these forest owners.
- Decreased Forest Productivity and Manufacturing Competitiveness. Repeal would increase operating costs and reduce forest investment causing a substantial loss of forest productivity over time. Reduced productivity would increase manufacturing costs and make U.S. manufacturing less competitive with foreign imports and in global markets.
- Lower Investment in Domestic Forestland. Repeal would deflate the investment value of private forests, moving investment from forestland into other domestic capital assets or into forestland in foreign countries with more favorable tax policies and higher investment returns.
- Declining Environmental and Social Benefits. Reduced market values will increase pressure to convert private forestland into other non-forest uses. This will reduce or eliminate the environmental, hunting, recreation and aesthetic benefits these forests provide.
 Private Forest Lands, Jobs, the Environment, and the Role of the U.S. Tax Code, National Alliance of Forest Owners, 2012.
- Tuesday, January 19, 2016