QFA- A  LANDOWNERS CHECKLIST
By Lynn Stephens, Registered Forester # 317

The questions surrounding P.A. 378, 379, and 380 collectively known as the QUALIFIED FOREST ACT began to filter through emails monitored during winter vacation back in February of 2007. As details of the new Act began to surface through the legislative dust landowners began to fire questions in my direction. It became apparent a "check list" of facts and figures would be useful to allow a landowner and potential enrollee of the new forest tax act to review in the process of deciding if the new act would prove to be to their advantage. Here is the "TOP TEN" list that I have assembled. It covers the major ground but may still have a couple voids not yet filled for situations not yet encountered.

1. Does the landowner have a minimum of 20 acres of commercial forest? The act requires a minimum tract of 20 acres and not larger than 320 acres and those acres must be contiguous.

2. Is the forest acreage currently classified by the assessing Township as Agricultural or receives the "HOMESTEAD EXEMPTION". If the answer to this question is `YES' then the landowner is already receiving the 18 mill school tax exemption and would likely not want to enroll in QFA.

3. Does the land in question have any structures located on the acreage? What is a structure? A deer blind without lights and a bed is not considered a structure but an old cabin, pole barn, or even an Antrim gas valve station shed will likely be considered a structure. Better get a ruling from the DNR supervising forester before you go any farther.

4. Is the land in question at least 80% forested and does that forest produce at least 20 cubic feet of annual growth. At this point you will need to get the advice of a forester. Most likely, if you have a "fully stocked" forest your wood will satisfy this requirement. Also at this time, field inspections will be necessary so a fee to the forester can be expected.

5. Why do I need a forester? The Act requires the land have a management plan and that plan must be written by a certified Stewardship plan writer, a Registered Forester (State of Michigan) or a third party certifying organization.

6. How much will the plan cost? The fee for the plan will vary since each professional will usually have a fee structure based on the acreage of the land being evaluated. Cost sharing through local Conservation Districts may be available in your area. Actual out of pocket expenses by a landowner (cost sharing) to a consultant will likely be in the range of $150.00-$200.00. Without cost sharing the fee will probably double.

7. Are there any other costs to get in QFA? Yes, the DNR must review the plan prepared by your consultant or stewardship plan writer and a fee of $200.00 must accompany the application for QFA. The DNR fee may only be $100.00 if the plan comes through a certifying organization.

8. Who files the actual QFA application? The landowner and the plan writer must both sign the QFA application. The plan writer would normally prepare the paperwork and submit it to the landowner. The landowner's check in proper fee to the DNR must accompany the application. That fee is not refundable.

9. How long do I have to file the application? Applications that are to be reviewed for enrollment on the 2008 township tax report must be received by the DNR by November 1, 2007. Upon approval by the DNR the application is then forwarded to the township. The township assessor has until December 3l, 2007 to forward the approved applications to the county for acceptance on the 2008 tax roll.

10. What if I don't get my application in for this year? The Act authorizes enrollment periods for each of four years beginning with 2007. The maximum number of acres that can be enrolled state wide in a given year is 300,000. Each subsequent year, new enrollments can be received under the procedures previously described. At the end of four years, if the Act is utilized to the fullest extent, the total acreage enrolled in QFA would be 1.2 million.

So there you have the list. There are three other issues that need special mention.

First, the question of withdrawal from the act and "tax recapture" payments due in the event of withdrawal are very important considerations a landowner must determine. The ruling at this time indicates the "original enrollee" of property into the Act would not be subject to withdrawal penalty or "tax recapture" if the property "transfer" satisfies the several definitions contained in the Act. This is a very important issue, so please, ask questions about this aspect of the Act with your forester, DNR representative and Township Assessor.

Secondly, since the QFA application must have a parcel identification number from the township tax roll it is important to understand the potential consequence of a decision to "split" an existing parcel into two parcels in order for the one forested parcel to qualify for the tax exemption. For instance, an 80 acre parcel with 30 acres of woods and 50 acres of tilled field, no structures and otherwise in compliance with the requirements might be considered to be split creating two parcels. However, it has been suggested by some township officials that splitting would affect the status of the parcels under the state's subdivision act so a landowner should be very sure they understand the possible consequences of that action. Also, there is some question as to how and if the "taxable assessed value" of a property might be removed and adjusted to SEV assessed value if a split were to occur within a given tract under one PIN. The benefit of the one tax classification may be unfavorably offset by the increased tax of the split parcel.

Finally, landowners currently enrolled in CFA will be allowed to transfer to QFA in 2007 without penalty. Such a change will result in a higher tax being paid under QFA but the existing provision of CFA requiring public access to the forest will not apply under the new QFA law.

NOBODY TOLD ME ABOUT INCOME TAXES!
By Jim Burns

You joined this association because you care about your timberland and want to manage it using sound forestry practices. If you have merchantable timber, you probably hired a forester, wrote a forest management plan, carefully designated your trees for a timber sale, then actually received payment for the trees harvested.

All of the forestry advice has paid off; you finally made some money. Everything (you think) is going according to plan, until you report your timber income for taxes, then find out you're going to pay a huge sum of money in federal and state income taxes. Depending on the tax bracket plus the self-employment tax, some taxpayers end up paying more than half of their sale proceeds to the government!

Suddenly, all of this forest management doesn't look like a good deal. If this scenario sounds familiar don't feel bad; you have a lot of company.

Capital gain tax treatment of timber sale income is detailed primarily under Sections 631(a) and 631(b) of the Internal Revenue Code. This is a highly specialized area of the tax law. The terminology used and appraisal requirements that are specified are written for experienced foresters. Most accountants do not have this kind of background, nor are they confronted with timber sales on a regular basis, if at all.

Based upon my experience, I would say that at least a majority of tax accountants know nothing about the sale of trees (timber) being capital gain income. The ones that do have no idea how to calculate a depletion deduction or implement the other provisions of Sections 631(a) or (b). The result of this is that most timber sales are reported as ordinary income, which when added to other income can move the taxpayer into a higher tax rate bracket plus, require the payment of an additional 15.3% for the self-employment tax, resulting in the huge tax bill referred to in my opening scenario.

In order to get the lowest tax rates possible, income from the sale of timber should be reported on your federal and state income tax returns as capital gain. If you owned the timberland for one-year or longer, your income qualifies as long-term capital gain and will only be taxed at a minimum of 5% to a maximum of 15% rate. The self-employment (Social Security) tax of 15.3% or the Alternative Minimum Tax does not apply.

If you sold timber in less than the one-year holding period, you should still report the income as short-term capital gain. The Net income will be subject to ordinary tax rates, but you still get to take a depletion deduction.

Whether you have long or short-term gain, you start with the gross income received then deduct any expenses associated with making the sale, such as payments to a forester for services, your travel expenses to inspect the land, etc. In addition to these expenses, you are entitled to take a timber depletion deduction for the volume of timber cut and sold.

The depletion deduction is a tax free return of your cost basis in the trees growing on the land at the date you acquired the property. How this deduction is arrived at would require a separate article to explain, but suffice it to say, it is an important part of minimizing the tax that you will have to pay. For example, clients of mine that purchased their property within the last 5 to 7 years usually end up with a loss for tax purposes because their depletion deduction is greater than the amount they received for the trees that were cut and sold. In other words, they paid no tax, plus had a loss to deduct from other income.

Normally, the tax savings between reporting as capital gain versus ordinary income is large - thousands of dollars.

I learned about capital gain tax treatment of timber when I was a forestry student and recognized what a great tax benefit it was to practicing good forest management. It puts forestry on a par with investing in the stock market.

Most foresters learned about this in school as well. but by inclination, want to concentrate on managing forests and leave taxes to the accountants. Accountants, on the other hand. probably never heard anything about timber in school. Hence, there is a big information disconnect between the two professions, which took me years to realize.

I owned and operated a forestry consulting firm for 25 years and as a standard business practice always prepared the Form T required to substantiate the depletion deduction and capital gain for each of my timber sale clients. Without exception, the tax preparer for every client would call to ask if this was legal and the correct way to report the income! It didn't matter if it was a high-powered tax firm in Boston or a local accountant.

For the past seven years I have been writing articles such as this and specializing in completing the tax reports for anyone's timber sale. Every year I receive a disturbing number of calls from readers who tell me that their tax preparer informed them it was not legal, or it could only be used by big corporations, or farmers could not use it, or various other reasons too numerous to mention. Based upon this experience, I have to conclude that this is a common occurrence throughout the country, not just the midwest.

Anyway, don't give up on forest management - it pays off. Just remember to include capital gain taxation in your forest management plan for future timber sales. If you sold timber within the last three years and reported the sale incorrectly, all is not lost. File an amended return.

In any event, if your tax preparer says you can't use the capital gain provisions, have them call me for a second opinion.

Jim Burns is a professional forester who owns and operates Burns Forestry Consultants and Timber Tax Services. For more information, call him at 989/348-3596 or 906/ 364-3238 with your questions.

LINNAEUS
By Bill Cook MSU Extension Service Forester

Ever heard of Carl Linnaeus? He's arguably the most well-known Swede to ever live. Sweden features his likeness on their currency. Places on the moon are named after him. The Swedish name -Linnea- grew popular to honor Carl. This year, the world (or at least Sweden) will celebrate his 300th birthday in May.

Linnaeus is best known for designing the scientific names of living things using Latin, the scholarly language of the day. Linnaeus first published this classification scheme in 1737 but the most recognized work was the tenth edition of -Systema Naturae- in 1758. Science does not recognize names given prior to 1758, but the first name given after that date takes precedent over any later names. The classification scheme has rules.

Every living thing has two names; one for the genus and a second for the species. The genus name is always capitalized, the species name is not, even if it is derived from the name of a person or place (e.g. Fraxinus americana). Scientific names are either italicized or put into quotes. So, sugar maple is called -Acer saccharum.- Acer-refers to -maple- (Greek origin for maples) and- saccharum-contains the Latin root for sugar or sweet. All other maples have the  - Acer- genus name. In this way, anyone will know that all -Acer- species are somehow related (over 100 species, worldwide), or at least appear similar.

Every scientist will also know that - Acer saccharum- refers to one, and only one, species. This avoids confusion with all the different common names and names in other languages. This international classification system revolutionized communication in the world of biology during the European Age of Discovery; when gains in all fields of knowledge grew at an amazing rate. It also helps organize living things into similar groups beyond genus and species, such as family, order, class, phylum, kingdom, etc. Up until that time, awkward systems devised by Aristotle, and others, had been used.

Linnaeus used the structure and function of living things to classify them, often reproductive organs for plants and appearances for animals. This roughly conforms to evolutionary relationships, although that was not likely an intention of Linnaeus. Charles Darwin didn't write his -Origin of the Species- until 100 years later.

Linnaeus took advantage of the rivalry between Swedes and Norwegians. As the chief name-giver of the time, he slighted the Norwegians by naming the most noxious critters after Norway. The infamous rat, spreader of plagues, was named -Rattus norvegicus!-

Scientific names sometimes recognize famous botanists, explorers, and other honored people. For example, jack pine is named -Pinus banksiana- after Joseph Banks, a renowned botanist and colleague of Linnaeus. Banks was one of the folks who suggested that Australia's Botany Bay be used to form a penal colony for the British, and he accompanied James Cook on his first epic voyage 1768-1771. -Banksia- is also a genus for about 80 species.

Many times, a geographical reference is built into a name. -Betula alleghaniensis- or yellow birch was described from the Allegheny Mountains. Other examples include -Ulmus americana- (American elm), - Prunus virginiana- (chokecherry), -Tsuga canadensis-(hemlock), and -Thuja occidentalis- (northern white cedar). The -occidentalis- refers to the -occident- or the west. as opposed to -0rientalis,- the -orient.- or the east. All this is from a European perspective, of course.

Less dramatic. many scientific names use Latin or Greek roots to describe something about the plant or animal. Glauca, alba, and nigra/nigrum refer to the colors blue, white, and black. Rugosa, glabrous, tomentosa, and pungens mean rough, smooth, hairy, and prickly. You might be able to figure out the meanings of tree species names such as -tremuloides,- -grandidentata,- -papyrifera,- -rubra/ rubrum,- -spicatum,- -ellipsoidales,-or -deltoides.-

People have a scientific name, too. -Homo sapiens- means the intelligent/wise modern human, from Greek and Latin roots. There were other species of -Homo- in history, too. These names all have meaning, even if the Latin words and spellings sometimes mystify us.

Carl Linnaeus was not only the inventor of biological classification; he was also a medical doctor, naturalist, botanist, zoologist, mineralogist, linguist, and philosopher. Truly, a great man of the Renaissance. So, for all those folks whose names end in  -son,- he's another reason to celebrate ethnic heritage!

FORESTRY PROGRAMS
By Bill Cook

Managing a forest or woodland results in many rewards; more money, lots of fun, stewardship satisfaction, family bonding, healthier conditions, better habitat, and so on. A managed forest also adds strength to our economies and lifestyles. It's this greater social benefit package that prompts government to make some offers to forest owners on behalf of their citizenries.

From the State of Michigan, there are two property tax abatement programs for forest owners interested in forest management. The Commercial Forest (CF) program replaces regular property taxes with a straight $1.25 per acre. The Qualified Forest Property (QFP) program exempts owners from the school operating taxes levied by local taxing units.

Of course, each program has eligibility requirements, fees, and protocols. After all, the government wants something in return for those tax reductions. Both programs require management plans. For many owners, one of the most important differences is the whether or not public access is allowed. The CF program opens enrolled forest to foot access for hunting, fishing, and trapping. The QFP program allows land to remain posted. That's part of the reason the tax breaks are greater for the CF lands.

The State of Michigan also offers cost-share assistance for the development of an approved forest management plan. Such a plan is key to most forestry cost-share and tax abatement programs. Beyond that, it's simply a good idea to work with a professional forester to illustrate the potential for a property. There's more to a forest than what most people realize.

Carbon sequestration programs have recently come to Michigan. Perhaps the most well known, at this point, are a pair of programs through the Delta Institute, a private non-profit company that trades carbon credits on the Chicago Climate Exchange. The Michigan Conservation and Climate Initiative (MCCI) currently offers a program for farmers, which includes a tree planting alternative. The forestry program may become available later this year, following the analysis of the pilot project.

County Conservation Districts sometimes employ foresters to visit private forestlands and provide guidance and referrals. In many areas, the Districts may be the best way to learn about forestry and conservation services in a local area.

The federal government also has a suite of programs, but many don't deal directly with forest management. Most work in conjunction with agricultural land to implement conservation measures. A variety of tree planting, habitat enhancement, and other activities might be cost-shared through the Conservation Reserve Program (CRP), Environmental Quality Incentives Program (EQIP), Wildlife Habitat Incentives Program (WHIP), and others. Dollars are often limited and each state develops funding priorities. The Natural Resource Conservation Service (NRCS) provides some technical assistance through cooperators and a state forester. Some of the finest programs are through forest industry. If your land lies within the service area of one of these programs, you can receive some of the best assistance available. NewPage (Escanaba), Weyerhaeuser (Grayling), Packaging Corporation (Manistee), and DPI (Alpena) are examples of industry working with forest owners. Additionally, a number of sawmills and logging companies offer timber harvest assistance, which may be different than forestry in a fuller sense.

Of course, if you wish to have a forester working directly for you, then hiring a professional forestry consultant is an excellent idea. For those folks genuinely interested in forest management or a bit reluctant to engage the government, consulting foresters offer the greatest variety and flexibility of services. Services come on a fee or commission basis and the investment usually pays significant dividends.

The Michigan Tree Farm Program has changed significantly in the past five years. Cooperating foresters work with forest owners in a variety of ways, depending on the wishes of the owner and the services of the forester. In some parts of the state, forest owners can now enroll in the National Tree Farm group certification program. This is one of the easiest ways to have private property enrolled in a forest certification program.

One of the best ways to learn more about these programs and all things related to forestry is by joining the Michigan Forest Association (MFA). The MFA consists of forest landowners from around the state that share stories, problems, solutions, and just about any other sort of forest related information.

Where to learn more about these forestry programs? A few Internet keywords will get you a long way. You can also contact DNR Service Foresters (only six of them) or a Conservation District. Most MSU Extension offices can find information and help identify the right people. It may take awhile to sort through and evaluate all the options and opportunities, but that's part of the adventure of owning a forest.