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August 30, 2007
HR 5420, the "American Jobs Creation Act." had several riders that affected timber investments. Most were changes in IRS Code Sections 631a&b that affected the capital gains eligibility of lump sum and paid-as-cut sales. See www.timbertax.org for more details. Existing TreeCents users can manually adjust their results for these changes. Revised editions will also update the tax effect calculation module. One provision contained 2 changes in planting cost treatments that will change forest investment analyses immediately. A positive change is to allow up to $10,000 of planting expenditures to be expensed in the year of occurrence instead of the preceding amortization of over 8 years. Expenses of expenditures in excess of $10,000 used to be capitalized (deducted uncompounded years later at harvest), but now can be deducted in an accelerated amortization over 84 months in the same pattern that used to apply to the first $10,000. Unfortunately, this gain is offset by a negative change. Tree Farmers will lose the 10% investment tax credit they used to receive for planting. There is a huge savings for industrial forests with large planting programs as they no longer have to carry excess planting costs (>$10,000/year) to the harvest year. The only savings for small forest owners is in reduced bookkeeping cost and complexity. Although the positive and negative changes do cancel somewhat, the net effect is usually slightly negative in present value terms. We tested for many typical forestry investment intensities, discount rates and forest owners' alternative tax rates across the regions we model. We found the net loss from the new law to range from -$2/acre to -$24/ acre in plantation present values. The following table shows how the new tax law net losses/acre are distributed.
Some TreeCents after-tax values should be adjusted accordingly. There is no effect in existing forest, grazing or agricultural modules, only in the timber plantation modules. As TreeCents is a single acre analyzer, the industrial advantages at expenditures > $10,000/year would not be addressed anyway. For a single acre, the effects are typically small. Users can reduce their plantation SEV/NPV after-tax results by the appropriate table entry for a quick approximation. So far, these are the only relevant changes that we've found, but there is a rumored interpretation of changes in passive eligibility. As soon as all the tax law changes become clearly defined as IRS code, our programmers will build them into future versions of TreeCents. For More Information Contact: Internet:
forestecon@moscow.com
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Copyright © 2003
Forest Econ Inc.
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