TAX INCENTIVES

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 New Law:

• Raises the deduction a donor can take for donating a conservation easement from 30% of their adjusted gross income in any year to 50%;
  
• Allows qualifying farmers and ranchers to deduct up to 100% of their income;
  
• Extends the carry-forward period for a donor to take tax deductions for voluntary conservation agreements from 5 to 15 years.

An Example -
Under the previous rules, a landowner earning $50,000 a year who donated a $1 million conservation easement could take a $15,000 deduction for the year of the donation and for an additional 5 years - a total of $90,000 in tax deductions.

The new rules allow that landowner to deduct $25,000 for the year of the donation and then for an additional 15 years.  That's $400,000 in deductions.  If the landowner qualifies as a farmer or rancher, they can zero out their taxes.  In that case, they could take a maximum of $800,000 in deductions for their $1 million gift.

Qualification as a Farmer, Rancher, or Working Forest Owner -
The new law defines a farmer or rancher 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".

The Timeline For This Expanded Incentive -
The new law applies to all easements donated in 2006 and 2007. 

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."

See your financial advisor to discuss how specific tax benefits may work for you. Tax benefits vary greatly depending on your particular tax situation, complexities in the tax code, and whether the land is owned by an individual, partnership, corporation, limited liability company, or a trust.

For more information contact your tax advisor and visit the Land Trust Alliance's website at: www.lta.org