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Income averaging—The form of income averaging analyzed would permit forest owners to treat income from a commercial thinning or timber harvest as if it were paid in three equal annual installments, beginning in the year of the sale. The tax schedule for long-term capital gains has two tiers: (1) amounts in the bottom tax bracket (for 1997, amounts up to $41,200 minus the owners’ taxable ordinary income) are taxed at 10 percent, and (2) additional amounts are taxed at 20 percent. Under income averaging, this calculation is made in each of the 3 years to which timber sale income is attributed, so that three times as much income qualifies to be taxed at the lower rate. Because the incentive alters the owners’ adjusted gross income for each year over which income is averaged, State income tax also is affected. Income averaging would provide a modest benefit to owners in each of the three timber types () (Greene 1998).

Reducing the tax rates for long-term capital gains—The 1997 Taxpayer Relief Act reintroduced the concept of preferential treatment for long-term capital investments and reduced Federal tax rates for long-term capital gains. The incentive analyzed would lower the rates further, to half those for ordinary income. Such an adjustment to Federal tax rates has no effect on State taxable income or tax due. Reducing the tax rates for long-term capital gains would provide a substantial benefit to owners in all three timber types (), with the entire cost borne at the Federal level (Greene 1998).

Enhancing the amortization provisions for reforestation expenses—The incentive analyzed would further reduce the need for forest owners to capitalize the high up-front cost of investments in forest management by doubling the amount of reforestation expenses that can be amortized (from $10,000 to $20,000) and compressing the recovery period from 8 to 6 tax years. The reforestation tax credit—10 percent of the first $10,000 of qualifying expenses—was assumed to be unchanged. The incentive would provide the greatest benefit to owners with reforestation expenses above the $10,000 amount that can be amortized under current law. Such cost levels are typical for loblolly pine and bottomland hardwood management. Owners with reforestation expenses under $10,000 would derive a small benefit from the shortened recovery period () (Greene 1998).

Permitting deduction of reforestation expenses—Permitting forest owners to deduct reforestation expenses as they occur would eliminate the need to capitalize any of the high up-front costs associated with forest management. Reforestation expenses would be on a par with property taxes, interest, and forest management expenses, which can be deducted in the year they occur. This incentive would provide a modest benefit to owners whose reforestation expenses are above the $10,000 amount that can be amortized under current law. It would not benefit owners whose reforestation expenses already can be fully amortized () (Greene 1998).

Establishing Green Accounts—Two types of Green Accounts were analyzed: one modeled after a traditional IRA, and the other modeled after the cafeteria-plan Medical Saving Accounts available to many taxpayers through their employers. Either type of account would enable forest owners to pay reforestation costs that cannot be amortized with pretax dollars, eliminating the need to capitalize them. For this reason, benefits from this incentive follow the same pattern as for deduction of reforestation expenses, except they are larger because reforestation expenses are paid with pretax dollars. Again, the incentive would provide no benefit to owners whose reforestation expenses already can be fully amortized under current law () (Greene 1998).

Stewardship investment tax provisions—An increasing number of NIPF owners hold and manage their land primarily to produce social or environmental benefits (Birch 1996). The IRC, however, provides favored tax treatment only to owners who manage their forests to produce marketable products or services. Expanding four provisions of the IRC would afford the same tax treatment to all owners who receive cost-share assistance from qualified Federal or State programs to actively manage their forests, whether they manage for environmental or social benefits, or for profit:

In each case, owners who could demonstrate that they did not have a profit motive would qualify for the provision on the basis of having made an approved stewardship investment. These provisions would afford little additional cash flow to the owners, since many of the cost-share practices will not yield marketable products () (Greene and Beauvais 2000). But they would benefit owners in all three timber types by reducing the cost of making environmentally beneficial stewardship investments.

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content: James E. Granskog and Terry K. Haines
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created: 4-OCT-2002
modified: 08-Dec-2013