CONSERVATION EASEMENTS HOW DO THE NUMBERS WORK? FEDERAL, STATE AND AD VALOREM TAXES HAL HANLIN, ESQ.
I. Introduction Hal Hanlin, Esq. Special Tax Counsel to Richardson Plowden & Robinson, P.A., in Columbia and Myrtle Beach. Talk is for educational purposes, not to substitute for advice from your tax advisor.
IRS CIRCULAR 230 DISCLOSURE To ensure compliance with requirements imposed by the IRS, please note that this document is not intended to include tax advice, and that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
II. Charitable Contributions in General • Generally deductible. • But limitations apply, and different rules apply to different types of property. • Some of the same rules apply to Conservation Easements and to other Charitable Contributions, some are different. • We have 20 minutes, so I can familiarize you with rules, but will not be able to go in-depth.
Deductions to Public Charities are generally deductible. Allowed under section 170 of the Tax Code This is true, generally at both the federal and state levels (SC has a “piggy-back” income tax system).
It is also generally true that: A. A deduction taken on the federal return will also be a deduction on the state return. B. Charities are generally either “50% charities” or “30% charities.”
The “50%” and “30%” are limitations that refer to the donor’s Adjusted Gross Income or “AGI.”
Example #1: I have AGI of $50,000 in year 2008. I make a charitable contribution to a 50% charity (generally a church, educational institution, non-profit medical institution, government body, or private foundation) of $25,000.
I make no other charitable contributions in year 2008. I can deduct the full $25,000 from my income for year 2008, lowering my taxable income from $50,000 to $25,000. My income taxes are calculated based on $25,000 of taxable income.
Example #2: Same facts as in Example #1, but instead of making my contribution to a 50% charity, I make a donation to a 30% charity. Then, instead of deducting the full $25,000, which is 50% of my 2008 AGI, I can only deduct up to 30% of my AGI. The amount that I can deduct is only $15,000, not $25,000. Therefore, in 2008 the amount on which I will pay income tax is $35,000. ($50,000 - $15,000).
So, in the second example, I deducted $15,000 rather than $25,000 in 2008. What about the other $10,000? Do I get a deduction for that? Yes, but in year 2009, not year 2008, assuming that I have at least $30,000 in 2009 income.
Notice that in both examples 1 and 2, I ended up with the same amount deducted as a result of my charitable contribution ($25,000), but the timing was different. In example #1, I took the entire deduction in year 2008. In example #2, I took $15,000 of the deduction in year 2008, and took $10,000 of the deduction in year 2009.
How long can I carry the deduction forward if I can’t use it all in year 2008, as in example #2? Generally the deduction can be carried forward for a maximum of five years in addition the year of contribution, under current law. In example #2, I could take deductions in years 2008, 2009, 2010, 2011, 2012 and 2013 if necessary to fully utilize my charitable deduction.
Do the examples above apply to my federal income tax return? Or to my SC income tax return? Or to both? Generally, the examples apply to both. South Carolina has a piggy-back income tax system. In order to calculate your SC income tax, you must first calculate your federal income tax. There are a few differences for various SC credits, and other items.
Notably in our context, federal tax statutes do not exclude deductions for placing golf courses under conservation easements. South Carolina law, however, prohibits tax benefits (deductions and credits) for golf course conservation easements.
Example #3: My income has been $500,000 per year, and I donate a conservation easement valued at $3,000,000 in year 2008. I get to deduct $1,000,000 for year 2008, don’t I? No. The percentage limitation is based on my income, not on the size of the contribution. At best, in this example I could deduct $166,667 for year 2008. But because of the AMT and other factors, I might not be able to deduct the full amount. My accountant and I will have to calculate some scenarios to see how this will work.
What about ad valorem taxes? Do I receive any benefit there as a result of contributing a conservation easement? Yes. Per SC Code Section 27-8-70, property subject to a conservation easement must be assessed taking the easement into consideration. And, per Code Section 12-43-232, if the property is suitable for agricultural use, it must be assessed at agricultural value.
Do any other tax benefits flow to property owners as a result of imposing a conservation easement on property in South Carolina? Yes. South Carolina provides a tax credit of up to $250 per acre, up to $50,500 taken in any particular year, for qualified conservation contributions, per SC Code Section 12-6-3515. Notice that this is better than a deduction, it is an actual credit. Also, South Carolina conservation credits, unlike those in NC and some other states, can be bought, sold, and even devised by will.
Are conservation organizations typically 50% charities or 30% charities? Under current law, conservation organizations are typically 30% charities.
Weren’t the tax benefits for conservation contributions better last year? Is there a chance that we will return to the better tax treatment of conservation contributions? Yes, the tax benefits were better in years 2006 and 2007 than they are currently, in two general respects: the percentage limitation and the number of years for which carry-forwards could be used.
In years 2006 and 2007, conservation contributions generally qualified for a 50% deduction rather than a 30% deduction. Also in years 2006 and 2007, deductions could be carried forward for a maximum of 15 years, rather than the maximum of 5 years that generally applies to charitable deductions.
Bills have been introduced in Congress to make the tax benefits that applied in years 2006 and 2007 permanent, but we have no way of knowing whether those will pass. But the changes do have some support from both Republicans and Democrats.
Do charitable contributions of conservation easements work like other charitable contributions? Or are there differences? There are differences, but many of the same rules apply. A special subsection of the Tax code, 170(h), applies to conservation easements.
Generally, a charitable deduction can not be taken as a result of a donation of less than a person’s entire interest in property. Conservation contributions, including conservation easements, constitute an exception to this general rule.
In order to qualify for a tax deduction as a conservation contribution, the donation must meet several requirements.
Per reg. 26 C.F.R. 1.170A-14(a), the contribution must: • Constitute a Qualified Real Property Interest. • Must be made to a Qualified Organization. • Must be made for “exclusively” for a Conservation Purpose.
Further, the conservation interest must be enforceable in perpetuity, and there must be “donative intent,” i.e., no “quid pro quo” is involved.
The land contributed or placed under easement must be considered “capital property” under other sections of the tax code to generate the tax benefits discussed, meaning that: A. Property that constitutes the holder’s stock in trade or inventory will not qualify (developers take note); and B. The property must have been held for at least one year at the time of contribution.
IV. Conclusion • Generally, federal and state income tax deductions are available for qualified conservation contributions, including conservation easements. • The donor will also generally be eligible for a South Carolina income tax credit on property contributed in South Carolina.
The South Carolina Income Tax Credit is transferable. (But the federal and state deductions are not). • If the donor wishes to retain the fee simple interest in a property placed under easement, then the donor will be eligible for lower property taxes.