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Tax Incentives * Current (as of 2010) incentives in-place, until a permanent act is passed. Federal Legislative ChangesIn 1996 Congress enacted the Pension Action, which enabled significant changes regarding the tax incentives for conservation easement donations. These changes expired at the end of 2007, providing an important but potentially limited opportunity for landowners. Bills to make the incentive permanent (H.R. 1831 and S. 812) have 264 House and 41 Senate co-sponsors from all 50 states, including majorities of Democrats and Republicans in the House. Both Presidents Bush and Obama’s budgets support extending the incentive.
Charitable Deductions for Qualified ConservationContributionsIncome Tax Deductions for IndividualsPrior 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 carry -forward 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.
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 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. 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. 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 carry-forward years).
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 under current 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
Sample for donations made if permanent law enacted
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
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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 |
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