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Michigan Forests Magazine
Excerpts From WINTER 2008 Issue
Conservation means the wise use of the earth
and its resources for the lasting good of men.-Gifford Pinchot |
WHAT CAN YOU DO
WITH WOOD?
by Bill Cook, MSUE
Energy and transportation fuels are
wood uses that have hit many headlines
recently. These uses are not new, but there
are newer technologies that can ramp-up the
use of –green—fuels. While expanding the
Michigan bioeconomy, we need to also
protect and expand traditional wood uses,
such as pulp, paper, lumber, panels, chemicals,
etc. The wood-using industry is a major
driver of Michigan's economy, and increased
wood use can also promote forest
health.
The research and development world is
buzzing with emerging technologies to utilize
–cellulosic—biomass to replace petroleum.
Hundreds of millions have been invested.
In Michigan, wood is by far the most
promising source of cellulose, a group of
complex sugars. Currently, the highlighted
product has been ethanol, but there are
many other choices.
Wood ethanol will soon be commercially
produced by thermo-chemical processes
and through employing biological
organisms (like making whiskey). Bio-gases
and biodiesel can serve as petroleum substitutes,
or they can be further refined to make
a range of other products. Gasification (e.g.
Fischer-Tropsch) renders heat, syngas, and
chemicals. Heat produced can be captured
and put to work. Fast pyrolysis applies heat
in a low oxygen environment that leaves
oils, char, gases, chemicals, and, further on,
transportation fuels. Fractionation disassembles
wood into component cellulose,
hemicellulose, and lignins. These can be
converted to ethanol, petroleum alternatives,
and many chemicals.
Different processes can be used in combination
with each other to more efficiently
capture energy and design products. In
many cases, it makes sense to build-in these
technologies with existing manufacturing
plants. NewPage Corporation and the Swedish
company, Chemrec, may be able to strike
a deal to produce high value products from
the black liquor by-product of paper-making.
Industry, government, and university
research in a –triple helix—partnership has
proven to be a successful model to advance bioeconomical initiatives and is actively
pursued here in Michigan. In the U.P., a
group will meet in February to explore needs,
barriers, and roles with this idea in mind.
Less speculatively and more traditionally,
there are many opportunities to use more
wood and less fossil fuel. A combined heat
and power station could be the centerpiece
of a biotechnology industrial complex. Using
wood in boilers to produce both heat and
power dramatically increases efficiency. A
major utility project in northeastern Minnesota
capitalized on this idea.
Currently, wood-power is being considered
for plants in Escanaba, Marquette,
and L'Anse. Its already employed at pulp
and paper mills and becoming increasingly
common in several European countries.
Actually, its not a new idea but cheap coal
has allowed us the luxury of producing only
power, while sending the majority of the
energy up the smoke stacks. Electric cars
using coal-based electricity are not as ecofriendly
as the marketers might have us
believe.
In terms of the bioeconomy sector of
wood products, Michigan already uses
wood for home heating and producing industrial
heat and electricity. Recently, a
program was launched in the U.P. to identify
schools with older conventional boilers and
assist them with the possible conversion to wood-using systems. Several schools have
been doing this for years with substantial
savings.
The old outdoor home boiler has been
a mainstay for years in rural areas. However,
with air quality standards down the road,
these systems need to be replaced with EPA
compliant units. Improved models are
steadily moving into the market.
Several regional pellet manufacturers
are helping to supply a growing demand. A
number of projects are in the planning stages.
Cleveland Cliffs has recently bought into a
–biofuel cube—company.
Michigan's storehouse of wood in the
forest continues to grow each year. Sort of
like a bank account, the principle continues
to increase and interest exceeds expenses.
The major threat is from private ownerships
choking-off the supply.
Wood has long been a heavily used
natural resource in the United States. Wanton
use of wood was largely responsible for
building this country. Over the past century,
we have learned how to sustainably
manage these resources for not only our
wood supply, but for all values associated
with forests.
Wood is an amazingly abundant and
versatile Michigan natural resource. Stocks
continue to increase. It is renewable,
carbon-neutral, and domestic. Its use has
the lowest environmental impact of any raw
material. And, we have the infrastructure to
make it work. If we choose to do so.
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STATE OF THE STATE FORESTS
GETTING IT TOGETHER
by Georgia Peterson
“The DNR is selling off a bunch of its
land!” This is an alarm I heard more than
once when I spent some time talking to
citizens up in the Northwest Lower Peninsula
this past fall. Usually I’m not savvy
about the latest rumors floating around in
the state. People ask me about lots of DNR related
things I know little about, like where
the public access is for Round Lake (how
many Round Lakes are there in Michigan,
anyway?) or how many cougars are living in
the state. For once, this was something that
I’d heard about. Rest assured, it’s not as
drastic as it sounds.
For those who haven’t heard, the DNR
is in the middle of a very long and painstaking
process to review its land holdings in the
state. This “Land Consolidation Review”
process began about three years ago to
inventory and evaluate all those little isolated
DNR parcels that lie outside the greater
boundaries of our state forests or other
state-managed lands. You may remember
from your school history lessons that the
state gained ownership of a lot of tax reverted
lands in the early 20th century. These
parcels were often scattered across the state,
eventually making it hard to manage this
patchwork of public land for natural resource-
based values. So the ultimate goal of
the land consolidation process is to consolidate
state lands to make it more efficient to
manage them in the future.
The DNR has been very systematic
about reviewing these lands, focusing on 9
to 11 counties per year. A team of specialists
from fisheries, wildlife, forestry and recreation
evaluates each isolated parcel in a
county for its importance in protecting threatened
or endangered species, access for
recreation opportunities, and/or other important
natural, cultural or historical features.
If it doesn’t seem that a particular
parcel has any significant value in these
ways, the team will make a recommendation
to the Natural Resources Commission and
DNR Director to exchange or sell it. The
recommendations are also shared with the
public for citizens’ review as well.
So what happens to a parcel that is
recommended for “disposal?” The term “disposal”
sounds worse than it is—it merely
means that ownership will be transferred to
someone else. The DNR’s first preference is
to offer it to another unit of government or
a conservation organization. They often get
first dibs. If these organizations don’t want
the parcel, it is offered for exchange with a
private individual who may own an in-holding
within existing state land boundaries. If
that doesn’t get any takers, it’s offered to
anyone who might be interested through a
bidding process. If there are still no takers,
it will be offered for direct sale. Regardless
of who ends up purchasing the land, the
proceeds from those sales go into a fund for
future purchases of land that are considered
to be ecologically important. They will be
most interested in the non-state land that
lies within the existing state boundaries.
How does a regular citizen get information
on the parcels that are being sold?
Anything that is available through this land
consolidation process will be posted on the
DNR’s website: www.michigan.gov/dnrparcels. Any interested buyer, though,
should beware that some of these parcels do
not have public access, or may not be of the
highest quality for forest management or
recreation. It’s important to do some research
on the desired parcel before buying
it. If you have any questions about available
land or the consolidation process in general,
you may contact Kerry Wieber at 517-373-
9905.
In my opinion, this has been a very
worthwhile effort by the DNR. After all, the
agency’s mission isn’t merely to be a land
holder, but to conserve and protect the
important natural features of this state for
current and future generations. Going though
this consolidation process will allow the
DNR to manage our vital public forest resources
in a much more thoughtful and effective way.
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TAX TIPS FOR WOODLAND OWNERS
MAKE SURE YOU RECEIVE
THE CORRECT FORM 1099
By Jim Burns
You received income this year for selling
cutting rights to some of the timber on your
land. Having read my prior articles, you want
to report this income correctly, as capital gain,
and save a large amount of money on your
federal and state income taxes. One more
obstacle to achieving this goal may be heading
your way.
In a matter of weeks, you will probably be
receiving a 1099 from the timber buyer, listing
the amount of money you were paid during
the year. The IRS has had a program in place,
for some time, requiring loggers and other
timber buyers to report these payments on
Form 1099. But which 1099? Based on my
experience, this point needs clarification because
most of my timber tax clients were
issued the wrong 1099 Form.
The correct form is 1099-S for real
estate transactions. Real estate transactions,
you ask, how can that be? Well, begin by
reading the instructions for Form 1099-S and
you will find under the list of “Reportable Real
Estate” – Timber Royalties.
This is explained by the fact that standing
trees attached to the soil are legally defined
as Capital Assets under the United
States real estate law. These laws were inherited
from English Common Law which was
developed a few centuries ago. Our federal
income tax laws have always recognized this
fact and allow income from the sale of timber
(trees) to be reported as Capital Gain for tax
purposes.
Many loggers and their accountants
don’t understand this and report stumpage
payments (timber royalties) on Form 1099 –
MISC. This causes real problems for the
landowner at tax time. This form is specifically
for Ordinary Income. The result of doing this
ensures that the sale of a capital asset automatically
gets reported and taxed at the higher
ordinary income tax rates. In addition to this,
the landowner will have to pay the 15.3% self-employment
tax into Social Security.
The only way to correct this error is to file
an amended return to get a refund of the overpayment.
Unfortunately, many landowners
and their tax preparers do not understand this
either and never correct the situation. One
experience of paying these exorbitant taxes
discourages many landowners from selling
any more timber in the future, which also has
a negative ripple effect. They talk to their
neighbors and other timber owners. This is
not good for encouraging proper forest management.
Normally, loggers make a down payment
plus a security deposit to the landowner in the
year they sign the timber sale contract. The
security deposit is not income and should not
be reported on any 1099. This deposit is to
guarantee performance and compliance under
the terms of the contract and does not
become income until it is retained for some
breach of the agreement, otherwise it is refundable.
The down payment is known as an advance
payment for stumpage. Under Section
631(a) of the tax code, the sale of timber is
reportable as income for tax purposes in the
year that the volume of timber is actually cut
and scaled, not when money is received.
In many cases the landowner will receive
an advance payment for stumpage in one
year, say 2007, but no timber is actually cut
and scaled until 2008. In that case, the advance
payment should be accrued into 2008
and reported as income for tax purposes in
that year.
A 1099-S will make the IRS aware that a
timber transaction took place and allow you to
do this.
Conversely, a 1099-MISC sends a signal
to the IRS that this is ordinary income in 2007
and had better show-up on the tax return for
that year. When any of my clients is faced with
this situation, I provide them with a letter
explaining the tax law for attachment to the
1099 received and their income tax return. If
they don’t, they
will start getting
nasty letters from
the IRS around July
of the next year and
will have a new pen
pal for quite awhile.
After writing
this series of articles,
I can hear the
skeptics out there
wondering if the
extra work involved
in reporting timber
income as capital
gain is worth the
expense. “After I
pay for the appraisal needed to set-up a
depletion account and prepare Form T, I’ll
probably only save a few dollars in taxes;
right?” WRONG!
The savings on your federal income
taxes alone will be in the thousands of dollars.
As an example, I went through client returns
for the past year to itemize actual results for
capital gain using a depletion deduction versus
ordinary income reporting. The only
returns I used were for small-acreage landowners
reporting under IRC
Section 631(b).
Individually, gross sales were in the range
of $2,012 at the low-end and $63,000 at the
high-end, with an average sale value of
$23,056. Reported as ordinary income, the
federal tax including self-employment tax that
would have been due, averaged $7,898.
Reported as capital gain income, 30% of
the returns had a loss for taxes and 70% had
a gain after the depletion deduction. The
landowners with a loss, paid no tax on the
timber income plus sheltered an average of
$9,643 of other income from taxes for an average
of $15,326 in net tax savings, after paying
for the timber tax preparation.
After paying for the timber tax preparation
expense, the landowners that had a capital
gain tax due, averaged a savings of $5,680
on their federal bill. This range of savings is
normal, so I would say that it is worth some
extra expense to save that kind of money.
Be pro-active about your 1099. Tell your
timber buyer to send you a 1099-S or if you
already received a 1099-MISC, ask them to
void it and issue a new, corrected
1099-S. It’s your money!
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.
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FOREST OWNERSHIP
By Bill Cook
MSU Extension Service Forester
Who owns the forest? Of course, the
owner of the property gets to decide what
happens on the property. So, many predictions
might be made by knowing something
about the mix of forest ownership.
In the Upper Peninsula, there is about nine
million acres of forest, covering over 80
percent of our landscape. Activities on the
forest affect not only the owner, but all the
people who live here, visit here, and benefit
from such a spectacular region as the U.P.
Our forests are more than just a pretty face.
For many reasons, the forest has a wide
variety of conditions and opportunities. It is
far from the same thing across the region.
The ownership patterns are unique, and
important.
Roughly half is public and roughly half
private. The public sector is dominated by
national forests and state forests. The private
sector is dominated by corporate forest
and non-industrial forest. These four sectors
represent different management styles
and recreational opportunities.
The Ottawa and Hiawatha National
Forests are owned by 300 million U.S. citizens.
They are managed for a variety of
purposes with a considerable amount of
forest set aside for purposes other than
timber harvest. They are managed under a
set of guidelines established by the U.S.
Congress and interpreted by a set of rules
created by the U.S. Forest Service in Washington,
D.C.
National Parks occupy about 575,000
acres in the U.P., mostly in Isle Royale and
the Pictured Rocks. Recreation and research
are the main purposes, with virtually no
timber harvest. They contain land with extraordinary
characteristics.
The term –state forest—means forest
land administered through the DNR for multipurposes.
Most of the state-owned 1.8 million
acres in the U.P. fall under state forest
jurisdiction. Other state-owned forest is
managed as parks and special areas, generally
off-limits to timber harvest. The difference
is important, in that the lands are managed
quite differently.
Of course, all state lands are owned by
about 10 million people; the citizens of Michigan.
Management planning has far less
bureaucracy than the national forests, but
the difference grows smaller each year.
On the private side, about two million
acres are managed by timber investment
corporations. A few years back, most of
these lands were owned by forest industry,
such as Mead Papers and International Paper.
Ownership re-organization has separated
ownership of the paper mills from the
land base, a national trend.
Names of new forest owners include
Plum Creek, GMO, and The Forestland Group.
For the most part, these corporate forests
are managed with timber production as the
main emphasis and most of the land is enrolled
in the Commercial Forest Program
(CFP). The CFP opens the forest to hunting,
fishing, and trapping. Corporate owners
also allow other recreational uses across
most of their forest land.
The second sector of private ownership
in the U.P. involves about 55,000 parcels
owned by individuals or small groups.
Most of the roughly three million acres are
managed with a mix of timber, wildlife, and
recreation objectives. These are the hunting
camps and recreational properties for which
the U.P. is so famous. Acreages range from
a few acres to many thousands of acres.
Management assistance comes from a number
of sources, such as forestry consultants,
Tree Farm Program, Michigan Forest
Association, state tax programs, and conservation
districts. However, many forest
owners have yet to engage professional
natural resource management.
Forest management is one thread that
ties all these ownerships together. Regardless
of ownership objectives or future vision
of the forest condition, management
provides the greatest opportunity for success.
The forests of the U.P. not only hold
the promise of our future, but will affect
people throughout the Midwest and across
the USA. They are too valuable of a resource
to leave unattended. We fail to manage them
at our own peril. |
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