Table 3--How corporate taxpayers will be taxed in 1987 and later years (1) 
Prior to July 1, 1987 
Taxable income Long-term gains 
Ordinary income 
Effective marginal tax rate 
July 1, 1987, and later 
Long-term gains Ordinary income 
Dollars 
0-25,000 
25,000-50,000 
50,000-75,000 
75,000-100,000 
100,000-335,000 
335,000-1,000,000 
1,000,000-1,405,000 
1,405-000 + 
BUREEREG 
EEEELESaAS 
Percent 
15 15 
15 15 
25 25 
(2)34 (2)34 
39 39 
34 34 
34 34 
34 34 
(1) A corporation with a taxable year that includes (but does not begin on) the July 1, 1987, date must prorate its tax on a daily basis. 
The new rates apply to that portion of the corporation's taxable year following June 30, 1987; the old rates apply to that portion 
before July 1, 1987. 
(2) As reflected by the table, a 5-percent surtax applies to income within these ranges. 
Timber Capital Gains--The new rules outlined 
above for capital gains in general also apply to tim- 
ber capital gains. That is, all capital gains resulting 
from timber sales will be taxed the same as ordinary 
income beginning in 1988. However, the provisions 
of pre-1987 law entitling taxpayers to capital gains 
treatment of timber income have been retained in 
the Internal Revenue Code (Sections 631(a), 
631(b), 1221 and 1231). Technically, capital gains 
continue to exist as a separate concept in the tax 
law even though there will no longer be a rate differ- 
ential between a long-term capital gain and ordinary 
income. This means that if tax rates on ordinary 
income are raised in the future, rates on long-term 
gain would remain unchanged--once again creating 
a rate differential between the two. 
For certain taxpayers, it may still be advanta- 
geous to qualify and report timber sale income as a 
long-term gain in 1988 and beyond even though it 
will be taxed the same as if reported as ordinary 
income. By so doing, those with large capital losses 
from any source will be able to deduct a bigger 
proportion of the losses during the current year 
rather than carrying them forward to later years. 
Under the new law, only $3,000 of capital losses per 
year may be offset against ordinary income, but 
there is no limit on offset against capital gains. 
Also, some timber owners may avoid paying 
social security tax on timber sale income by report- 
ing it as a long-term gain rather than as ordinary 
income. Individual taxpayers who qualify as sole 
proprietors with respect to timber holdings that are 
considered to be a business are subject to self- 
employment social security payments on timber 
sale proceeds reported as ordinary income. Capital 
gains, on the other hand, are not subject to the 
social security tax. 
The new law also contains a special rule that 
permits timber owners who have been cutting under 
a 631(a) election to unilaterally revoke it. Prior law 
required Internal Revenue Service permission for 
revocation. Since there will no longer be a rate dif- 
ferential between ordinary income and long-term 
Capital gains for certain taxpayers in 1987, and for 
all in 1988, revoking may be advantageous for some 
who do not dispose of timber in the same tax year 
in which they cut it. Otherwise, they would be taxed 
in the year of cutting on the timber's gain in value as 
stumpage, even though no income has yet been 
realized from its disposal. For other woodland own- 
105 
