After more than eleven months of limbo, the enhanced conservation easement tax incentive was reinstated and made permanent as part of the Congressional budget deal on December 18, 2015. This federal tax incentive provides preferential treatment to donations of conservation easements that ordinary charitable donations do not receive. Let’s take a closer look at the history of the enhanced tax incentive and how the enhanced tax incentive benefits donors of conservation easements.
The Uncertain History of the Enhanced Conservation Easement Tax Incentive
The enhanced conservation easement tax incentive was first introduced as part of the Pension Protection Act of 2006, which was enacted as Public Law 109-280 on August 17, 2006. It was originally set to expire on December 31, 2007. Ever since then, Congress has been extending this enhanced tax incentive for one- or two-year periods, usually at the end of the year or even retroactively from the following year, to wit:
- The extension of the enhanced tax incentive for Tax Years 2008 and 2009 was approved by Congress on June 18, 2008 as part of the Food, Conservation, and Energy Act of 2008 over a presidential veto. Of all the extensions of the enhanced tax incentive, this was the only one to be passed fairly early in the year.
- The extension of the enhanced tax incentive for Tax Years 2010 and 2011 was approved by Congress on December 2, 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
- The extension of the enhanced tax incentive for Tax Years 2012 and 2013 was approved by Congress on January 1, 2013 as part of the American Taxpayer Relief Act of 2012.
- The extension of the enhanced tax incentive for Tax Year 2014 was approved by Congress on December 16, 2014 as part of the Tax Increase Prevention Act of 2014.
This Congressional procrastination made it difficult for landowners interested in donating conservation easements to undertake proper tax planning. Many landowners took a leap of faith and donated easements in the (ultimately fruitful) hope that the enhanced tax treatment would be reinstated for that year. An unknown number of others did not.
The Path to Permanence
Amid this uncertainty, the land preservation community continued to provide support for making the enhanced tax treatment permanent. But first it had to be reinstated; Congress had allowed the enhanced tax treatment to expire on December 31, 2014. In February of 2015, H.R. 641 and S. 330 were introduced specifically to reinstate the enhanced tax treatment, but, as is so often the case in Congress, these standalone bills fell by the wayside until their provisions could be bundled together with hundreds of other compromises and concessions in a larger, comprehensive bill.
This larger bill happened to be H.R. 2029, the Consolidated Appropriations Act, 2016, which formed part of the annual budget deal. The Consolidated Appropriations Act was really a conglomeration of several smaller acts, including the Protecting Americans from Tax Hikes (PATH) Act of 2015. This latter act was notable for making many enhanced tax incentives permanent, not merely the enhanced conservation easement tax incentive. The House of Representatives voted on December 17, 2015 to pass the bill by a vote of 318–109. The Senate voted on December 18, 2015 to pass the bill by a vote of 65–33. President Obama signed the bill into law that same day. (For more detailed information on the bill’s path through Congress, see the Library of Congress’s legislative summary for the bill.)
Unlike Congressional bills in previous years, this bill provided for the enhanced conservation easement tax treatment to be both reinstated and made permanent. As with any law, “permanent” really means “until Congress changes its mind”; there is nothing to prevent Congress from repealing the enhanced conservation easement tax treatment at some point in the future. However, the provision in the Internal Revenue Code providing for the enhanced tax treatment no longer has an expiration date, and so it will remain in effect indefinitely.
The new law is retroactive, so conservation easements donated earlier in 2015 will still receive the enhanced tax treatment. Although I have been referring only to conservation easements, the enhanced tax treatment also applies to outright donations of land for conservation purposes.
What Exactly Is “Enhanced” About the Enhanced Conservation Easement Tax Incentive?
Without the enhanced conservation tax incentive, donations of conservation easements would be treated the same as any other charitable donation. The enhanced conservation easement tax incentive differs from ordinary charitable deductions in two important ways.
Donors May Use More of Their Conservation Easement Deductions in a Given Year
For an ordinary charitable donation of what the Internal Revenue Code calls “capital gain property” (which would include a conservation easement), an individual donor can only deduct up to 30% of his or her adjusted gross income (as adjusted for any net operating loss carrybacks) in charitable deductions each year. Thus, a donor with an adjusted gross income of $100,000 in a given year can deduct up to $30,000 that year in charitable deductions for donating “capital gain property.”
However, for donations of conservation easements, an individual donor can deduct up to 50% of his or her adjusted gross income (as adjusted for any net operating loss carrybacks) in conservation easement deductions each year. Thus, a donor with an adjusted gross income of $100,000 can deduct up to $50,000 in conservation easement deductions. Note that this cap on deductions includes any ordinary charitable deductions that are also claimed. In other words, if a donor with an adjusted gross income of $100,000 maxes out his or her ordinary charitable deductions at $30,000, he or she can only claim $20,000 of conservation easement deductions that year.
Qualified farmers and ranchers benefit even more greatly from the enhanced conservation easement tax incentive. Qualified farmers and ranchers can deduct up to 100% of their adjusted gross income (as adjusted for any net operating loss carrybacks) in conservation easement deductions each year. To be considered a qualified farmer or rancher, the donor must earn more than 50% of his or her gross income from farming. “Farming” is broadly defined to include raising crops, rearing animals, and harvesting timber. (See Section 2032A(e)(5) of the Internal Revenue Code for the exact definition.)
This does not necessarily mean that qualified farmers and ranchers will pay zero federal tax. As previously mentioned, any net operating loss carrybacks will need to be recaptured. Other taxes, such as self-employment tax and the alternative minimum tax (AMT), might also apply. As in all tax matters, a taxpayer should consult with his or her accountant to determine how these deductions will affect his or her specific tax situation.
Additionally, note that the foregoing provisions apply only to individual taxpayers. Corporations do not receive the benefit of the enhanced conservation easement tax incentive, unless the corporation is a qualified farmer or rancher. Ordinarily, a corporation may deduct only up to 10% of its taxable income in charitable deductions. If the corporation is a qualified farmer or rancher, however, the corporation may deduct up to 100% of its taxable income in conservation easement deductions.
Donors May Use Their Conservation Easement Deductions Over a Longer Period of Time
Next, the enhanced conservation easement tax treatment provides for a longer carry-forward period, meaning that individuals donating a conservation easement have more time to use up the resulting tax deductions.
In general, ordinary charitable deductions for donations of capital gain property may only be used to offset income recognized in the year of the donation plus the following five years, for a total of six years. In other words, if the taxpayer does not have enough income in the first year to use up all the charitable deductions at one time, any unused charitable deductions may be used to offset income in the second year; any of those charitable deductions not used in the second year may be used to offset income in the third year; and so on through the sixth year. Any charitable deductions not used in the sixth year expire.
With the enhanced conservation easement tax treatment, on the other hand, charitable deductions from the donation of a conservation easement may be used to offset income recognized in the year of the donation plus the following fifteen years, for a total of sixteen years. This can be particularly helpful to individual taxpayers who are “land rich and cash poor” and who otherwise might not be able to use up all of these tax deductions.
Unlike individual taxpayers, corporations do not receive the benefit of the enhanced conservation easement tax incentive at all, unless the corporation is a qualified farmer or rancher. For those corporations that are qualified farmers or ranchers, the same rule applies as for individual taxpayers: Charitable deductions from the donation of a conservation easement may be used to offset income recognized in the year of the donation plus the following fifteen years, for a total of sixteen years.
The Effect of the Enhanced Tax Incentive on Land Conservation
The land preservation community has embraced the reinstatement of the enhanced conservation easement tax incentive with open arms. See, for example, the Land Trust Alliance’s blog post on the subject, describing the reinstatement of the tax incentive as a “huge win.” Everyone with whom I have spoken has been optimistic about the impact of the reinstated tax incentive on land preservation in the coming years. Many landowners whom I have counseled over the past several years have been particularly focused on the federal tax treatment of their conservation easements—even though Virginia also has strong state tax incentives in the form of the land preservation tax credit—and so I concur in that optimism.
Thus, from a tax perspective, now is an excellent time to donate a conservation easement. The fact that the enhanced conservation easement tax incentive no longer has a set expiration date means that landowners can look forward to a great deal more stability as to what tax benefits they can expect, at least for the next few years. Of course, Congress is capricious and can decide to take away the enhanced conservation easement tax incentive at any time—and, with our nation’s continuing budget deficit, it would be unreasonable to expect this or any other enhanced tax deduction to last forever. Stay tuned here for more updates as they occur.