A version of this article was previously published in the Aug. 3, 2020, edition of the Portland Business Journal.
A flood of information has circulated since the start of the COVID-19 pandemic, which can make it challenging to identify strategies that could have a positive impact on your business.
While the pandemic isn’t the first business disrupter you’ve faced, it does provide an opportunity to reassess your tax landscape. At the end of the day, the goal is to establish a business and personal planning process that balances the need for current cash flows with long-term planning obligations and opportunities.
Tax considerations
Following is a list of five tax considerations for companies in the forest products industry. These strategies include utilizing COVID-19-driven tax stimulus legislation as well as existing opportunities that might have slipped from your radar.
1. Tax loss carrybacks
Many companies have periods of net operating losses (NOLs) mixed with periods of income. Forest products companies frequently face the ups and downs of construction, export, and log markets. One year may yield high levels of taxable income, while the next year results in a significant tax loss.
Tax reform in 2017 dictated that NOLs couldn’t be carried back. This was amended in the CARES Act passed in early 2020. Now, companies can carryback net operating losses incurred in 2018, 2019, and 2020 for up to five years.
If you or your company had tax liability between 2013 and 2017 and generated tax losses in 2018, 2019, or 2020, a carryback could be especially helpful because the maximum federal tax rate through 2017 was 39.6% for individuals and 35% for corporations. Further consideration should be given to your selection of tax methods, such as bonus depreciation, as you assess the opportunity from loss carrybacks.
2. Evaluation of timber depletion pools and timber gain planning
Your approach to timber depletion is one of the more significant planning areas to garner potential tax savings or deferrals. Various methods can be used to recover the cost basis of your investment in timber assets. The recognition of these expenses for accounting and tax purposes occurs as the timber is harvested.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Depletion methodology starts with the original purchase price allocation of a timberland acquisition to timber, land, and other identifiable property. Finding the appropriate balance of complexity within your approach and ascertaining the benefit provided can often be a detailed but flexible process.
The goal is to optimize your cost allocation process between merchantable timber and other asset categories to accomplish your business' financial and tax objectives. Remember that you may be able to change your depletion method at a later date if the situation warrants it — you aren’t necessarily locked in.
3. R&D tax credits for wood product manufacturers
The forest products industry is no stranger to innovation. With safety, quality, and cost-efficiency top concerns for the industry, many companies invest in the development of new equipment or manufacturing processes as well as new products to maintain a competitive position in their markets.
The pandemic shutdown has also accelerated plant upgrades that potentially weren’t slated for 2020. The investment in equipment, labor, and materials for development projects not only helps companies keep a competitive edge but could also qualify for R&D credits to offset their outlay of capital.
The R&D tax credit is a dollar-for-dollar tax savings that directly reduces a company’s tax liability. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years.
In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes.
4. Work opportunity tax credits (WOTC)
The WOTC is a federal credit distributed at the state level that’s designed to encourage businesses to hire individuals receiving government assistance to help them become more self-sufficient.
Value of credit
As hiring rebounds, this credit can be of significant value. Depending on which target group the individual belongs to, the maximum credit per new hire can range from $2,400 to $9,600.
The value of the credit is determined by three things:
Target group the employee qualifies under
Number of hours worked
Wages earned in the period of employment.
It must be applied for within 28 days of a new hire’s start date.
Target groups
Family members that receive Supplemental Nutrition Assistance Program benefits (food stamps)
Family members that receive short- or long-term Temporary Assistance to Needy Families or Aid to Families with Dependent Children (welfare)
Qualified (unemployed or disabled) veterans
Qualified ex-felons or pardoned, paroled, or work-release individuals
Individuals who completed or are completing vocational rehabilitation programs
Qualified “summer youth” ages 16 or 17 years old living in an empowerment zone
Individuals receiving Supplemental Security Income
Residents of designated communities (individuals living within a rural renewal county)
Individuals who were unemployed for at least 27 consecutive weeks and received unemployment compensation under state or federal law during this period
5. Estate and family transition planning
Successful estate planning often depends on timing. Now could be an opportune time to review your estate plan in the midst of economic disruption.
The recent decline in value of privately held and closely held companies during the pandemic could allow estates with significant assets to transfer assets at low values. Hopefully, these reductions are only temporary and revert to normal levels when the pandemic subsides.
Until then, assets can be transferred to your heirs at today’s low values. These transfers could allow for potentially significant growth rates and the opportunity to avoid gift and estate tax when values do return to a level of normalcy.
Following are two considerations.
Lifetime exemptions
In 2020, the federal lifetime gift and estate tax exemption is $11.58 million. The lifetime exemption is adjusted for inflation each year; the current amount is based on $10 million, adjusted for inflation from 2010. In 2026, the available exemption is scheduled to decrease to $5 million, adjusted for inflation from 2010. The gift and estate tax rate is 40% on gifts or taxable estates above that threshold.
With the large exemption, few Americans will be subject to the gift or estate tax; but if you are, it’s a good time to update your estate plan.
Natural resource credit (NRC)
Oregon provides a state-specific estate tax credit for natural resource-based estates. More particularly, the NRC applies to forestland or forestland home sites, timber, forestry businesses, and other agriculture and fishing assets.
It also applies to working capital used in the qualifying activity of up to 15% of the value of the assets, but limited to $1 million. With upfront planning, the NRC could benefit applicable taxpayers.
