Posted on March 20, 2018 by Philip Tabas
The sweeping tax law enacted last December changes the U.S. tax code in ways that affect individuals, businesses, corporations, and tax-exempt entities. The law, the Tax Cuts and Jobs Act of 2017 (TCJA), enacts comprehensive tax reform and was crafted and passed by Congress along party lines. What will it mean for charitable giving and particularly for land conservation?
Tax policy has long been an important incentive to foster land conservation in the US. Indeed, there is evidence to show that the tremendous growth of the land trust conservation community resulted largely from the enactment of the 1980 Federal tax deduction for conservation easements. The TCJA retains that deduction but alters the incentive to use it and other tax strategies for land conservation.
The charitable deduction: The TCJA retains the charitable deduction but increases the standard deduction while repealing and limiting many itemized deductions, all while reducing marginal tax rates for individuals, corporations, and certain pass-through business entities. The Act raises the percentage limit on cash donations for those who itemize deductions to 60% of adjusted gross income (AGI), up from the current 50% of AGI. Finally, the “Pease rule” limiting all itemized deductions, including but not limited to charitable deductions, by certain high-income earners is repealed. No specific changes were made to IRC section 170(h) regarding gifts of conservation easements or to the ‘enhanced’ tax deduction for gifts of conservation easements (designed to encourage conservation easement donations by enhancing the ability of “land rich, cash poor” taxpayers to claim a tax deduction for such gifts).
What are the implications?
These changes have given rise to significant speculation that the TCJA will reduce charitable giving in general and adversely impact the charitable sector, including land trusts and conservation organizations. Gifts of land or easements for conservation are likely to continue to be made but the changes in marginal tax rates may diminish the after-tax value of such gifts.
It is likely that higher income taxpayers will continue to have financial incentives to donate easements while taxpayers of more modest means could have the tax value of their easement gifts reduced; this might alter the types of land conservation and ecological outcomes that can be incentivized by easement donations.
Estate tax changes: The TCJA also doubled the credit against the estate, gift, and generation skipping transfer tax effectively eliminating many estates from being subject to tax, although this provision will only be in effect from 2018 through 2025. Consequently, the Act is likely to weaken the tax incentive to make charitable contributions at death, including gifts of land or conservation easements, at least during that period.
Real estate changes: The TCJA retains the like-kind exchange tax deferral for real property under current law, but repeals such treatment for exchanges of personal property. Thus, easements or land with conservation significance may continue to be exchanged for other like kind property enabling the landowner to defer the recognition of otherwise taxable gain.
Syndicated conservation easement transactions: Over the past few years, there has been a dramatic increase in the number and valuations involved in so-called syndicated conservation easements transactions. These arrangements essentially are tax shelters designed to generate profits to investors in pass-through entities from a charitable donation of a conservation easement typically at inflated appraised values. The IRS recently issued Notice 2017-10 describing these transactions as “listed transactions” and requiring disclosures by participants and material advisors involved in these transactions.
While It remains to be seen whether anything in the new tax law will affect such tax shelter transactions, the reduction in the highest marginal individual income tax rates and a new deduction for partnerships, Subchapter S corporations, and sole proprietorships are likely to combine to mean that syndicated easement promoters will have to have more aggressive easement valuations to make the after-tax returns comparable to what they were under the old law. This may make it harder to find investors. Hence, buying into one of these tax shelters may not bring the tax savings it used to, but that may simply prompt promoters to rebut that with bigger write-offs.
The conservation community is working to address such syndicated easement transactions by advocating for a bill currently before Congress (S. 2436, Charitable Conservation Easement Program Integrity Act) which would directly target the abusive transactions while continuing to reward true philanthropy that helps to conserve farms, ranches, working forests, wetlands and wildlife habitat for future generations.