October 17, 2016
Tax Planning for Loggers 101
Tax laws are complex and frequently change, so it's important to consult with your accountant before you make tax decisions. Here are a few things you can discuss with your tax advisor, including recent important changes to tax laws that affect loggers.
Deduct new equipment purchases
Made permanent last year by Congress, Section 179 allows you to deduct the full purchase price of new or used equipment from your gross income. The deduction was created by the U.S. government as an incentive to encourage businesses to invest in equipment. Section 179 allows you to deduct up to $500,000 on equipment purchases, including forestry machines, subject to a purchasing limitation of $2 million. This spending cap represents the maximum amount you can spend on equipment before the Section 179 deduction is reduced, dollar for dollar, by the amount exceeding the $2-million threshold.
Apply Bonus Depreciation of 50 percent
Bonus Depreciation was renewed in 2016. There is no purchasing limitation on Bonus Depreciation, and it only applies to new equipment. "Bonus Depreciation is especially beneficial to loggers who exceed the Section 179 spending cap," explains Jamie Boulette, CPA, tax consultant with PFBF CPAs, a firm that works extensively with loggers. "Section 179 is generally taken first. Bonus Depreciation allows loggers to front-end more of the equipment cost and further reduce taxable income."
Write off repairs
Regularly scheduled, routine maintenance does not have to be capitalized. Under Internal Revenue Service (IRS) Reg. 1.263(a)-3, you can expense routine maintenance on equipment to keep it in "ordinarily efficient operating condition." Routine maintenance can be performed at any time during a piece of equipment's useful life, but in order to be considered routine, you should reasonably expect that the activity will be performed more than once during the life of the equipment.
Consider trading in equipment
Trading in a machine has certain tax advantages over selling it. "Let's say you buy a skidder for $200,000," explains Boulette. "When you purchase the machine, you take an expense deduction and write off the cost of the machine. When you sell it for $95,000 three years later, you will incur a taxable gain. If you take the same skidder and trade it in toward the new one, the tax basis on the new machine is reduced, and there is no taxable gain to pay."
Practice good bookkeeping
Carefully document everything. Mileage logs are very important. The IRS will disallow all mileage unless logs are kept. Keep a log in the glove compartment of your pick-up or logging truck, and record your business miles.
Proceed with caution
Your tax advisor can help you develop strategies to lessen or shift current and future tax liabilities. The natural inclination is to write off everything you can, but that might not be the best idea, according to Boulette. "If you write off everything this year, you may pay nothing in taxes, but you will be blindsided by a huge tax bill next year. Instead, you may want to only write off a portion of this year's purchases, so you have something to carry forward to next year. Work with your accountant to carefully plan the amount you deduct, so that it works best for you — in terms of protecting both cash flow and your short-and long-term financial goals."