Utah Open Lands Conservation Association, Inc. • 2188 S. Highland Dr., 203 Salt Lake City Utah 84106 • tel: 801.463.6156  • fax: 801.463.6226 • Executive Director: Wendy Fisher Wendy@UtahOpenLands.org • Operations: Catherine Cargill Catherine@UtahOpenLands.org •

Conservation Director: Arthur Morris, PhD Arthur@UtahOpenLands.org

Tax Incentives

 

Good News for Conservation Tax Incentives

 

Congress recently enacted significant changes regarding the tax incentives for conservation easement donations. Some of these changes are effective immediately and are currently set to expire at the end of 2007, providing an important but potentially limited opportunity for landowners.

 

Federal Legislative Changes

On August 17, 2006, the President signed the Pension Protection Act of 2006 (the Pension Act). The Pension Act significantly increases the ability of individuals and corporations, particularly farmers and ranchers, to use the income tax deductions from the donation of conservation easements that are considered qualified conservation contributions under the Internal Revenue Code (the Code).

 

The Pension Act tax changes offer a major opportunity for individual and corporate landowners to realize unprecedented tax benefits and protect the conservation values on their land in perpetuity. Below is a summary of the Pension Act highlights, as well as brief summaries of related Pension Act provisions that address appraisals of qualified conservation contributions and the Code treatment of historic districts and structures. Some practical advice on how to best take advantage of the Pension Act increased tax incentives are also included.

 

Charitable Deductions for Qualified Conservation Contributions 

 

Income Tax Deductions for Individuals

 

Prior to passage of the Pension Act, the income tax deductions available for qualified conservation contributions were generally limited to no more that 30% of the taxpayer adjusted gross income (AGI). The Pension Act raises the amount of a conservation easement fair market value an individual taxpayer may claim as an income tax deduction to 50% of AGI.

 

Previously, individual taxpayers were allowed to carry forward the value of any qualified conservation contributions that exceeded the 30% of AGI limitation for up to 5 years. The Pension Act allows individuals to carry forward the value of a qualified conservation contribution in excess of the new 50% of AGI limitation for up to 15 years.

 

Qualified farmers or ranchers may deduct the conservation easement value up to 100% of their AGI, with the same 15 year carry forward period, for donations of conservation easements that satisfy the following requirements:

 

A qualified farmer or rancher is a taxpayer who earns more the 50% of his or her income from the business of farming in the taxable year in which the conservation contribution is made. The definition of farming is a narrow definition set forth in the Code.

 

The conservation easement must cover property that is used, or is available for use, for agricultural or livestock production.

 

The conservation easement must contain a restriction that the property will remain available for agricultural or livestock production.

 

 

Income Tax Deductions for Farming and Ranching Corporations

 

Prior to the Pension Act, corporations faced a limitation of up to 10% of their taxable income for qualified conservation contributions. The Pension Act allows corporations earning more than 50% of income from the business of farming to deduct up to 100% of taxable income with a 15 year carryforward period for a qualified agricultural conservation easement. In order to qualify, the stock of a farming or ranching corporation cannot be readily tradable on a securities markets.

 

Effective Date

 

The increased Pension Act tax incentives apply to qualified conservation easements donated from January 1, 2006, through December 31, 2007. Unless Congress votes to extend the Pension Act provisions before they expire, on January 1, 2008, the income tax rules for conservation easements will revert to their status before the Pension Act passage. The requirement that the conservation easement contain a restriction that the property will remain available for agricultural or livestock production only applies to conservation easement donations after the date of enactment of the Pension Act.

 

Appraisal Rules

 

The Pension Act permanently tightens the oversight standards governing appraisers and lowers the threshold for imposition of accuracy-related penalties upon taxpayers by the IRS for all charitable gifts. The key changes are as follows:

 

The thresholds for imposing accuracy-related penalties on taxpayers were lowered. The threshold for substantial valuation misstatements has been lowered, from a claimed value of 200% of the amount determined to be the correct value, to 150%. The threshold for gross valuation misstatements has been lowered from 400% to 200%.

 

The thresholds for accuracy-related penalties for substantial and gross estate or gift tax valuation misstatements were also lowered.

 

The appraiser penalties were increased for appraisals used to support a tax position if the appraisal results in a substantial or gross valuation misstatement. The Pension Act also makes it easier for the IRS to initiate disciplinary proceedings against appraisers.

 

The Pension Act tightens the definition of a qualified appraiser under the Internal Revenue Code. The act also references this more restrictive definition in its modified definition of a qualified appraisal.

 

Historic Districts and Structures

 

The Pension Act contains several changes to the Internal Revenue Code treatment of historic districts and historic structures to address Congress concerns about questionable facade and other historic preservation easements. These changes do not have any expiration date. Below are brief descriptions of the key provisions:

 

The Pension Act changes the definition of a certified historic structure to now exclude structures or land areas in certified historic districts, so that the definition of a certified historic structures in a registered historic district includes only buildings. This does not affect the IRC '170(h) reference to preservation of an historically important land area.

 

A qualified conservation contribution deduction for a facade easement protecting the exterior of a building will only be allowed if the easement protects the entire exterior of the building, including the space above the building, and the building front, rear and sides.

 

An easement protecting a building in a registered historic district must prohibit any changes to the building inconsistent with the building’s historical character.

 

Donors of historical preservation easements must enter into written agreements certifying that the easement-holding organization is a qualified organization under the Internal Revenue Code, and they must submit a qualified appraisal, photographs of the protected building, and a list of the restrictions of the development of the building.

 

Tips to Capitalize on Pension Act Tax Incentives:

 

Spouses Should Consider Donating Property and Filing Taxes Jointly

With the Pension Act expansion of the carryforward period from 5 to 15 years, jointly titling property and paying income taxes would ensure that the tax deduction survives the death of either spouse, and thus preserve the maximum tax benefit for the duration of the carryforward period.

 

Window for Corporate Farmers and Ranchers

Corporations have historically been constrained to claim a deduction equal to no more than 10% of their taxable incomes. The Pension Act offers a window for farming and ranching corporations to reap the same benefits as individual farmers and ranchers. From now until the end of 2007, corporate farmers and ranchers should evaluate whether to take advantage of this opportunity to offset up to 100% of their taxable incomes for up to 16 years (year of donation plus 15 carryforward years).

 

Land Trusts Should Consider Amending Forms

To qualify for the 100% deduction and the 15 year carryforward period, an agricultural conservation easement must contain a restriction that the property will remain available for agricultural production. Land trusts should therefore revise their form conservation easements to include this restriction.

 

Sample Tax Calculation

 

The sample does not consider capital gains issues which would effect a bargain sale and does not apply alternative minimum tax effects.  This sample is not meant to provide legal counsel or advice.  To obtain a correct calculation, individuals should consult their tax attorney.

 

Sample for donations made during 2007

 

Landowner I

Donation Value:         $5,000,000

AGI:                               $1,000,000

50% of AGI:                 $500,000

Deduction: $500,000 x 10 Years = $5,000,000 (the entire value of the gift)

Tax Savings:$1,750,000

 

Landowner II

Donation Value:         $5,000,000

AGI:                               $5,000,000

50% AGI =                   $2,500,000

Deduction:  $2,500,000 X 2 years = $5,000,000 (the entire value of the gift)

Tax Savings:  same as above

 

Sample for donations under 2003 guidelines

 

Landowner I

Donation Value:         $5,000,000

AGI:                               $1,000,000

30% of AGI:                 $300,000

$300,000 X6 years= $1,800,000

Tax savings: $630,000

 

Landowner II

Donation Value:         $5,000,000

AGI:                               $5,000,000

30% of AGI:                 $1,500,000

$1,500,000 X 3.33 =             $5,000,000

Tax Savings:               $1,750,000