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Introduction to Taxes

Introduction to Taxes. Basic Types of Taxes. Property – ad valorem Death - ad valorem Income – salary, wages, profits, etc. Sales – price paid Value added (VAT) – tax on value added at each step in production and distribution Employment – salary and wages Other – excise, license, etc.

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Introduction to Taxes

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  1. Introduction to Taxes

  2. Basic Types of Taxes • Property – ad valorem • Death - ad valorem • Income – salary, wages, profits, etc. • Sales – price paid • Value added (VAT) – tax on value added at each step in production and distribution • Employment – salary and wages • Other – excise, license, etc.

  3. Property Tax • Based on value of property • Fair market value • Assessed value • Milage rate x Assessed value = tax due • 1 mil = $0.001 • Biases long-term investments in timber if standing timber is assessed • Example

  4. Impact of Ad Valorem Tax on Timber Annual Property Tax Due Land – increase $50 per year Timber – increase 6% per year Assessed value – 10% of market value Milage – 100, i.e. 1% Initial value of land --$1,500 Land & Timber Initial value of timber --$2,100 Land Only

  5. Death Taxes • Types • Federal • estate • gift • State • estate • Inheritance • Basis for tax – ad valorem • Requires land and timber appraisal

  6. Income Taxes • Types • Federal • State • Local • Basis • Earned income - Wages, salary, business profits • Gains from disposal of assets • Sale price minus amount paid for it (basis) • Depletion • Percentage – oil, gas, minerals • Cost - timber

  7. Sales Tax • Types • Federal • Pittman-Robertson tax on ammunition, etc. • Duck stamps • On-road fuel • Alcohol • State – some purchases exempt • Local – county, city • Basis • Sales price

  8. Employment Taxes • Workmen’s compensation – form of insurance for on-the-job injuries • Rates for Washington (per hour worked)

  9. Employment Taxes • Unemployment • State (Indiana – 0.565% to 8.362%) • Federal Unemployment Tax Act (FUTA) • 6% of first $7,000 of wages, less partial credit for state unemployment tax paid

  10. Employment Taxes • Federal Insurance Contributions Act (FICA), aka, social security • Employer pays 6.2% • Employee pays 6.2% • Capped at $113,700 in 2013 • Medicare – hospital • Employer and employee – 1.45% each • If wages > $200,000 employee’s rate – 2.35% • No cap

  11. Employment Taxes - Summary • Assume a logging employee earning $40,000

  12. Other Taxes • License fees • Registered forester, logger • Vehicles • Hunting • Fishing • Excise • Import tariffs

  13. Forester’s Role • Provide valuations needed for basis allocation • Timber • Land • Allocation procedure • Original basis • Purchase – acquisition cost • Inheritance – date of death fair market value, stepped-up basis (“stepped-up basis”) • Gift – grantor basis carries over (“carryover basis”)

  14. Forester’s Role • Allocation of original total basis • Basis of each asset is it’s % of total fmv times original total basis, e.g. • Acquisition cost - $100,000 • FMV timber - $75,000 • FMV land – $50,000 • Total fmv - $125,000 • Timber is 60% • Land is 40% • Original basis of timber - $100,000 x 0.60 = $60,000 • Original basis of land - $100,000 x 0.40 = $40,000 • Total original basis is $100,000

  15. Forester’s Role • Assisting with timber sale • Ask if seller has basis in timber • If they do provide estimate of total volume on tract, not just volume to be sold • How to claim timber depletion on sale • Depletion unit = $ basis / total volume • $60,000/ 300 MBF = $200 per MBF • Depletion allowance = Depl. unit X Volume sold • $200 per MBF x 150 MBF sold = $30,000

  16. Forester’s Role • Gain on timber sale • Revenue from sale less Depletion allowance • $55,000 revenue - $30,000 depl. allowance = $15,000 taxable gain • Warn client that timber sale revenue is taxable even if they don’t get an IRS Form 1099-S. Timber buyers are now required to report purchases on 1099-S.

  17. Explain long-term capital gains treatment • Ordinary income if not sold on the stump • Warn them that if they sell “on the shares” the contract must grant logger a “contract right to cut timber on their own account” • If not treated as capital gain it’s ordinary income • Base rate is 10% to 39.6%, • Plus self-employment tax of 15.3% • Plus 3.8% if net investment income >$125,000 single, or $250,000 joint • Max rate of 58.7%

  18. Capital Gains Tax Rates • If owned more than 1 year it’s long-term capital gain on Form 1040, Schedule D • Taxed at • 0% for 10% to 15% brackets, • 15% for 25%, 28%, 33%, or 35% brackets, • 20% for 39.6% bracket • Plus 3.8% on net investment income if adjusted gross income (AGI) > $125,000 single, or $250,000 joint

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