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A University of Florida Cooperative Extension Service and Florida Division of Forestry joint project: Chris Demers (editor), School of Forest Resources & Conservation, UF, P.O. Box 110410, Gainesville, FL  32611-0410, (352) 846-2375 or cdemers@mail.ifas.ufl.edu Alan Long (co-editor), School of Forest Resources & Conservation, UF, (352) 846-0891 or ajl2@ufl.edu Todd Groh (co-editor), Florida Division of Forestry, 3125 Conner Blvd, Tallahassee, FL 32699-1650, (850) 414-9907 or groht@doacs.state.fl.us Chuck McKelvy (co-editor), Florida Fish and Wildlife Conservation Commission, 3125 Conner Blvd, Tallahassee, FL 32699-1650, (850) 414-9911 or mckelvc@fwc.state.fl.us

Tax Tips for 2002

Hard to believe it’s already time to start thinking about tax time again, but here we are at the beginning of 2003. The following is a summary of “Tax Tips for Forest Landowners for the 2002 Tax Year” by Larry Bishop, Forest Taxation Specialist with the U.S. Forest Service. This is intended to inform you of some of the things to keep in mind when preparing your Federal income tax return for the 2002 tax year, particularly if you incurred any costs, revenues or cost-share payments associated with timberland management. This is by no means exhaustive and we strongly recommend consulting other sources for a more comprehensive treatment of this topic. Some useful on-line resources are provided at the end. Your Basis and Tax Records Part of the price you receive from a timber sale is taxable income and part is your investment, or basis, in the timber sold. The original cost of purchased timberland, or the value of inherited land, should be allocated with land, timber, and other capital accounts. Then, adjust the basis in each of the accounts up for new purchases or investments and down for sales or disposals. Keep good records, including a written management plan, map, and documents supporting current deductions six years beyond the date the return is due. The basis and timber depletion should be reported on IRS Form T (timber), Schedule B. Passive Loss Rules Under passive loss rules you can be classified in 1 of 3 categories: (1) investor, (2) passive participant in a trade or business, or (3) active participant (materially participating) in a trade or business. You are materially participating if your involvement is regular, continuous, and substantial. Generally, active participants get the best tax treatment of deductible expenses, but you must show this with thorough records. Keep records of all business transactions related to managing your timber stands and other business activities such as landowner meetings. Odometer readings to and from meetings, canceled checks for registration fees, and copies of meeting agendas are some examples of documentation of meeting attendance. If you are an active participant in a timber business you must dispose of your timber under the provisions of Section 631 to qualify for capital gains. This means that timber must be sold on a pay-as-cut or “cut and convert” basis rather than lump sum. If you have considerable passive income, such as Conservation Reserve Program annual payments, it may be to your advantage to be considered a passive participant. Reforestation Tax Credit and Amortization The reforestation tax credit and 7-year amortization is among the best tax advantages for forest landowners. If you reforested during 2002 you can claim a 10% investment tax credit for the first $10,000 spent for reforestation. You can also deduct (amortize) all of your 2002 reforestation costs, up to $10,000.00, minus half the tax credit taken, over the next 8 tax years. You can amortize reforestation expenses on Form 4562, but the election to amortize must be made on a timely tax return for the year in which the reforestation expenses were incurred. Passive owners may not be eligible for this credit and amortization. Caution: the credit and 7-year amortization are subject to recapture if you dispose of your trees within 5 years of planting for the credit; and within 10 years of planting for the amortization. Capital gains and Self-employment Taxes You could pay significantly more in taxes if you report timber sale income as ordinary income rather than as a capital gain. Also, capital gains are not subject to the self-employment tax, as is ordinary income. The net self-employment tax rate for 2002 is 15.3% for self-employed income of $400.00 or more. Cost-share Payments All or part of the cost-share payments received in 2002 under any of the Federal or State cost-share programs must be reported. Here are the options: 1 - Include the payments as income and then recover the part that you pay plus the cost-share payment through the amortization and reforestation tax credit described above. 2 - Exclude the “excludable portion” from income if certain conditions are met: a - the cost-share program has to be approved for exclusion by the IRS and b - the maximum amount excludable per acre is the greater of the present value of $2.50 per acre or the present value of 10% of the average income per acre for the past 3 tax years. Cost-share programs approved for exclusion by the IRS are the Forestry Incentives Program, Forest Stewardship Incentive Program, Wetlands Reserve Program, the Environmental Quality Incentive Program, and the Wildlife Habitat Incentive Program. If you decide to exclude, you must attach a statement to your return that states specifically what cost-share payments you received, that you choose to exclude some or all of them, and how you determined the excludable amount. Conservation Reserve Program (CRP) If you planted trees during 2002 under CRP you must report your annual payment as ordinary income. All other CRP cost-share assistance must also be reported as ordinary income, but payments used to establish trees can be claimed as part of the reforestation expenses reported for the reforestation tax credit/7-year amortization. Casualty Losses A casualty loss must result from an event that is identifiable, damaging to the property, and sudden or unexpected or unusual in nature (e.g., wildfires and storms). Your claim for casualty losses cannot exceed the adjusted basis minus any insurance or other compensation. Note that the IRS has ruled that losses resulting from drought or beetles generally do not qualify for a casualty loss deduction because they are not sudden, but they may qualify for a business- or investment- loss deduction. Management and Maintenance Expenses Your annual expenses for the management of an existing timber stand can be itemized during the tax year they are incurred, although the amounts that can be deducted depend on your tax category (investor, active, passive). If it is not to your advantage to itemize deductions for 2002 you should capitalize these expenses. Proper tax planning is a tedious but important part of timberland management. We strongly recommend contacting a professional tax advisor to help you with this task if you are uncertain of the procedures. Timber Tax Resources on the Internet: “The Forest Landowners Guide to the Federal Income Tax” (Ag. Handbook No. 718) provides a thorough overview of timber taxes. You can access this, “Tax Tips for Forest Landowners for the 2002 Year”, and other publications on-line at the bottom of the Southern Region Forestry Extension page at www.soforext.net/ See the National Timber Tax Web Site for a comprehensive treatment of timber taxes at www.timbertax.org IRS publications and forms are available at www.irs.gov.

New Findings by Longleaf Alliance By Mark J. Hainds, Research Coordinator, The Longleaf Alliance, Auburn University - Solon Dixon Forestry Education Center, Andalusia, Alabama

Production of container-grown longleaf seedlings has almost doubled since 1996 (data collected by the Longleaf Alliance). As container production increased across the Southeast, planting guidelines for container-grown longleaf appear to have been adapted from bareroot longleaf planting guidelines. Many tree planters, experienced in planting bareroot loblolly and slash pine, believe that “deeper is better” regardless of the pine species being planted. Planting guidelines for longleaf typically emphasize a narrow planting window with a major concern with “shallow planting” that will expose the plug. The prevailing theory is that an exposed plug will act as a “wick”, drying out the plug and increasing the chances of seedling mortality. Furthermore, most guidelines allow for the terminal bud to be covered with soil at the time of planting, assuming that erosion will uncover the bud and allow unrestricted growth. Consequently, these planting guidelines tend to encourage “deep planting”. To test the validity of these long-accepted guidelines, The Longleaf Alliance installed four separate planting depth studies with container-grown longleaf pine seedlings in 1998, 2000, and 2002. The findings of these studies are summarized in the tables below. The silvopasture and Godwin sites are well-drained upland soils, the orchard site has moderately-drained soils, and the Monroeville Experimental Field site is poorly drained and wet. Very shallow planting depths were tested at the Monroeville site, the most shallow testing with half of the plug out of the soil. Terminal Bud Depth at Planting % Survival Silvopasture site % Survival Godwin site % Survival Orchard site 1.2” beneath soil surface 47 23 46 .4” beneath soil surface 59 30 86 exposed 89 60 80 .8” above soil surface 84 70 81 Terminal Bud Depth at Planting % Survival Monroeville Exp. Field site exposed 74 1.2” above soil surface 74 2.4” above soil surface 79 Results from these studies indicate that, on some sites, deep planting may reduce seedling survival and growth. Results also indicate that containerized longleaf seedlings may be more tolerant of shallow planting than previously thought, thus possibly discrediting the “wick” theory. Surprisingly, plugs only half-planted at the Monroeville site showed the best survival there. Guidelines for other states may be adjusted but further studies are required before “shallow planting” is universally adopted. For more information about these planting depth studies, contact Mark J. Hainds at 334-427-1029, or hainds@alaweb.com