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The New Conservation Tax Incentives
For Private Voluntary Conservation
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006 that contains a significant expansion of the federal tax incentive for land conservation. The income tax savings from these new incentives can be significant and substantial for a landowner. The 2008 Farm Bill renewed this powerful conservation tax incentive for voluntary conservation agreements that had expired on January 1st.
The Tax Incentives
- Raise the deduction a donor can take for donating a conservation easement from 30% of their adjusted gross income (AGI) in any year to 50%;
- Allow qualifying farmers and ranchers to deduct up to 100% of their income
- Increase the number of years over which a donor can take from 6 to 16 years
The renewed incentive is retroactive to the beginning of 2008, and is in effect through the end of 2009.
An Example
Under the prior law, a landowner earning $50,000 a year (AGI) who donated a conservation easement worth $1 million could take a $15,000 deduction for the year of the donation, as well as $15,000/year for another 5 years - a total of $90,000 in tax deductions.
Under the new law, that landowner can deduct $25,000 for the year of the donation, and $25,000/year for the next 15 years - a total of $400,000 in deductions. If the landowner qualifies as a farmer or rancher, they could zero out their taxes. In that case, they could take a maximum of $800,000 in deductions ($50,000/year) for their $1 million gift.
Qualification as a Farmer, Rancher, or Working Forest Owner
A farmer or rancher is defined as someone who receives more than 50% of their income from "the trade or business of farming". The law references an estate tax provision (Internal Revenue Code (IRC) 2032A(e)(5)) to define activities that count as farming. Specifically, those activities include:
- cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;
- handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and
- the planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market.
The qualified farmer or rancher provision also applies to farmers who are organized as C corporations. For an easement to qualify for the special treatment, it must contain a restriction requiring that the land remain "available for agriculture".
Other Conservation Restrictions Still Apply
Conservation easement donations are subject to the same restrictions as they were before. For example, easements must meet the "conservation purposes" test defined in the existing law; they cannot be donated as part of a "quid pro quo" agreement; and they must be donated to a qualified organization such as a land trust - a governmental unit or a publicly-supported charity that has "a commitment to protect the conservation purposes of the donation, and …the resources to enforce the restrictions."
For more information contact your tax advisor and visit the Land Trust Alliance's website at: www.lta.org
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