7 minute read
Land easements can be great tax planning and fiscal planning tools for businesses. Businesses that establish land easements for a charitable purpose — called conservation easements — may be eligible for a tax deduction. The conservation easement tax deduction can be worth up to the fair market value of the land, which means the deduction can help reduce tax liability for years to come. But business owners can use land easements for other business purposes, too.
A land easement is a legally binding agreement to either:
(1) allow for the limited use of land, or
(2) limit the use of land.
For example, a utility company may need an easement to enter someone’s property to access power stations, or a land trust may restrict the public from using land to protect natural wetlands or grasslands. Both types of agreements are considered land easements.
Conservation easements are a type of land easement. Conservation easements seek to protect and conserve the land for environmental, agricultural or cultural conservation purposes in perpetuity. Typically, conservation easements are entered into between the landowner and an entity, like the National Parks Service, a tribal government or a nonprofit organization.
When landowners establish a conservation easement, they continue to hold title to the land and may even be able to continue to use that land, but the government or nonprofit entity makes sure the land is preserved for its intended purpose. The result is that when the landowner is ready to sell the land, the conservation easement will stay in place and the new owners will be subject to those same restrictions.
When landowners establish a conservation easement in collaboration with a government or nonprofit entity, they give away some of their rights to the property, but in return they can take a charitable deduction for the fair market value of the land. Conservation easements are considered charitable contributions and are deductible up to 50%* of the taxpayer’s adjusted gross income (AGI), or up to 100% of AGI for ranchers and farmers. Corporations are limited to 10% of their taxable income. If the conservation easement exceeds this AGI limit, they can carry the unused deduction forward for up to 15 years.
*This AGI limit was raised to 100% for 2020 only.
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Conservation easements allow for more flexibility than if the taxpayer relinquished the rights to the land fully. First, depending on the easement, landowners may still have access to their land. For example, some easements may allow the landowner to occupy, grow crops, have cattle or build structures on the land. Second, establishing an easement does not relinquish their ownership of the land; it only restricts their right to use it. If they want to sell the land later in life, they can still do so.
The only conservation easements eligible for a deduction are easements that meet all three of the following tests:
1) The easement donation is of qualified real property interest. Qualified property interests include the entire interest in the property (other than a mineral interest), a remainder interest or a permanent restriction on the use of the property.
2) The easement contribution was made to a qualified organization. Qualified organizations include most 501(c)(3) entities along with churches, educational organizations, medical providers, agricultural researchers, governmental units, certain private foundations and others approved by the IRS.
3) The easement was made solely for conservation purposes. Qualified conservation purposes include:
Depending on the entity type, the charitable deduction that is allowed will vary. Shareholders and partners will have different limitations than a C corporation, and there are special rules for farmers.
S corporations and partnerships will report the charitable contribution amount on their returns, and the charitable amounts then flow through to the partners or shareholders in the business. One of the principle rules of pass-through entities is that income, credits, and deductions keep the same characteristics for the partners/shareholders as they had for the business, so the conservation easement keeps its charitable characteristic. Shareholders and partners are limited to the individual charitable deduction of 50% of their AGI. Any amounts in excess of the AGI limitation can be carried forward for up to 15 years.
C Corporations must take the charitable deduction on its own income tax return. Shareholders are not able to take the charitable contribution of their own returns. C Corporations are limited to a charitable deduction equal to at most 10% of their taxable income. Contribution amounts in excess of 10% of the corporation’s taxable income can be carried forward and used to offset income for 15 years.
Farmers and agricultural workers are given special limitations when they contribute land to conservation easement. In the case of “qualified farmers,” donations can be up to 100% of their AGI. In order to be deemed a “qualified farmer” for purposes of these increased limitations, the gross income from the farming business must be at least 50% of the taxpayer’s total gross income.
As mentioned, the purpose behind the conservation easement must be solely for conservation purposes. While this does not mean that you cannot take tax considerations into account, the overall purpose of the contribution must be to support conservation. If you are creating the easement in coordination with a reputable organization, the conservation purpose should be fairly self-evident.
Be aware though that the IRS may look more closely at conservation easements. The IRS has put what are called “Syndicated Easements” on their “Dirty Dozen” list for several years in a row. A “Syndicated Easement” is a scheme where multiple individuals or entities form a partnership and make conversation easements donations with the purpose of benefiting from the tax deductions resulting from the donations. The IRS has identified some of these transactions as being abusive tax shelters and increased enforcement against them.
Conservation easements can be a good way for businesses that have non-productive land to benefit from charitable opportunities while supporting conservation efforts. Businesses interested in donating land with a conservation easement should talk to their tax advisor to see how these kinds of strategies can affect their tax planning.
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