In December of 2015 Congress made permanent a federal tax incentive for conservation easement donations that can help thousands of landowners conserve their land.
- Raises the deduction a donor can take for donating a conservation easement from 30 percent of his or her income in any year to 50 percent;
- Allows qualifying farmers and ranchers to deduct up to 100 percent of their income; and
- Extends the carry-forward period for a donor to take tax deductions for a voluntary conservation agreement from 5 to 15 years.
This is a powerful tool for allowing modest-income donors to receive greater credit for donating a very valuable conservation easement on property they own. For land trusts, this translates to the possibility of protecting much more land through the use of conservation easements.
The changes apply to donations made at any time in 2015 and to all donations made after that.
Charitable Deductions for Qualified Conservation Contributions
The conservation tax deduction allows a landowner to claim a federal income tax deduction for the value of a donated easement — similar to other charitable donations. The value of the easement is calculated by determining the difference in property value before and after the easement. That’s the amount of value the landowner gave up by protecting the land.
The newly established (2015) Enhanced Incentive makes a big difference for landowners who are thinking about donating an easement. In particular, it allows working farmers and ranchers, as well as landowners with modest incomes, to realize more of the value of the deduction. Here’s what the Enhanced Incentive does:
- Raises the maximum deduction a donor can take for donating a conservation easement from 30% of their adjusted gross income (AGI) in any year to 50%
- Allows qualified farmers and ranchers to deduct up to 100% of their AGI
- Increases the number of years over which a donor can take deductions from 6 to 16 years
Income Tax Deductions for Individuals
The income tax deductions available for qualified conservation contributions are generally limited to no more that 50% of the taxpayer adjusted gross income (AGI).*
Individual taxpayers are allowed to carry forward the value of any qualified conservation contributions that exceeded 50% of AGI limitation for up to 15 years.
Income Tax Deductions for Farming and Ranching
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.
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.
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 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.