D24—Lancaster Farming, Saturday, November 17,1984 Tax reform affects timber NEWARK, Del. —Several provisions of the 1984 Tax Reform Act affect timber owners and operators. According to University of Delaware extension farm management specialist Don Tilmon, the most significant change is probably the one which reduces the holding period for long-term capital gains from one year to six months, with the ex ception of timber disposals under Section 631 (a) of the Internal Revenue Code. The new holding period applies to assets acquired after June 22, 1984, and before Jan. 1, 1988. It applies to all capital assets, in cluding timber held for investment and timber sold (under Section 631) with an economic interest retained. A special holding period applies to timber whose owners elect to treat cutting as a sale-that is, timber sold under Sesction63l (a). The Tax Reform Act of 1984 provides that for 631 (a) tran sactions timber or a contract nght-to-cut must be held “on the first day of such year and for a period of more than six months before such cutting.” (The Code used to read, “for a period of more than one year.”) According to Tilmon, the effect of the new wording is that the holding period could be as short as six months if 631 (a) timber were held on the first day of the tax year, or as long as one year, if the timber were acquired on the second day of the tax year. Since small timber owners may sell timber only occasionally, in the past they may have able to take advantage of income averaging provisions to reduce the tax on a large timber income in one year. The rules for income averaging have been tightened. For com putation years beginning after 1983, Tilmon says it is now necessary for income in the tax owners year to be 140 percent of the average income in the previous three tax years m order to use income averaging. Before the 1984 Tax Reform Act, income in the tax year had to be only 120 percent greater than that in the previous four years. The change applies to tax years beginning after December 31,1983. “Timber owners who cannot qualify for income averagmg might consider selling their timber in two or more tax years,” the farm management specialist says. Another change in the 1984 act affects taxpayers who were planning to take the option of treating an investment in qualifying property as an expense under Code Section 179, rather than as a capital investment. The upper limit on the amount that could be treated as an expense was $5,000, but the limit was due to be 8.5% Annual Percentage Hate rv