The Great Toilet Paper Wipeout of 2020

April 8, 2020

Coronavirus has turned millions of Americans who used to laugh at the doomsday preppers on National Geographic into converts. Your neighborhood supermarket is working overtime to keep shelves stocked as panicked shoppers rush to settle in for stay-at-home orders. And the first item to disappear was . . . (checks notes) . . . toilet paper. Your grocery store aisle is probably still bare, and even Amazon ran out. But why? Is it because, as some psychologists say, bringing home the sheer bulk of a jumbo pack gives shoppers a sense of control in uncertain times? Or something more nefarious?

The answer will be a disappointment to conspiracy theory fans. (Speaking of which, Epstein didn’t kill himself.) The toilet paper market is divided into two parts. There’s residential paper — the soft, plush stuff those smarmy bears advertise on TV. (Apparently, they don’t all do it in the woods.) And there’s commercial paper — scratchy rolls the size of truck tires or, even worse, those uselessly tiny folded squares you find in disgusting gas station “rest” rooms. With all the “business” we’re doing at home, we’ve simply upset the usual balance of supply and demand.

Now, if you were to sit down and draw a Venn diagram with circles representing “toilet paper” and “taxes,” you probably wouldn’t expect there to be much overlap. But there is, and it has to do with the trees that the toilet paper (and tax forms, for that matter) come from.

It turns out trees don’t just grow on trees. You have to plant them, manage them, protect them, and harvest them. That process takes at least 10-20 years, and sometimes 40-50. So the tax code gives you plenty of breaks to encourage such long-term investment. Naturally, you can deduct your day-to-day operating expenses. Your sales will be taxed at lower long-term capital gain rates so long as you own your stand for more than one year. And you can take a special “depletion deduction” for standing timber you buy or inherit that breaks out a “basis” in the trees from the rest of the property.

Toilet paper farmers (OK, “timber producers”) can also profit from going green. Trees sequester carbon, which helps combat climate change. Growing trees can help you earn and sell carbon credits. These are especially valuable for new forests, sustainably-managed forests, and timber for long-lived wood products like houses and furniture (as opposed to cheap pulpwood for paper or pallets). You can also donate land-use rights for valuable charitable deductions, including “working forest conservation easements” that let you keep profiting from harvesting timber on your land.

Timber producers get one final break that uses the time value of money to shrink tax bills. It’s an advanced strategy, sometimes called a “monetized installment sale,” that lets you sell a capital asset like a business or appreciated real estate and defer the tax for 30 years. Ordinarily, if the accumulated balance of payments owed to you tops $5 million, you have to pay interest on the unpaid tax. But that doesn’t apply to agricultural products. So timber producers, including giants like Office Max, have used it to defer tax on sales of up to $1.47 billion.

Here’s hoping you have plenty of toilet paper stocked up to carry you through this crisis. But this is no time to flush your long-term tax plan down the toilet. In fact, tax planning, as part of your financial defense, is more important now than it was just a few short months ago. So count on us to serve as your financial first responder!

Don’t hestitate to contact us.

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