On August 27, 2018 the IRS proposed new regulations changing how it would characterize state income tax credits (such as the Virginia Land Preservation Tax Credit “LPTC”) that are received when people make charitable gifts. If this rule passes, landowners who donate conservation easements would have to count the Virginia LPTC issued to them as a payment and their federal income tax deduction would be reduced by the value of the state tax credits received.
This would be a significant change to long standing federal tax treatment of these types of state credits that would negatively impact the rate of land conservation in Virginia and other states with similar programs. Take a look at the summary of PEC’s concerns regarding the proposed rule. For more detailed analysis of the proposed rule, see the policy brief prepared for PEC by Timothy Lindstrom, Esq, which provides a in-depth analysis of how the proposed rule is inconsistent existing IRS practice and/or will likely slow the rate of land conservation in Virginia.
There is a 45-day comment period that began on August 27, 2018 and ends on October 11, 2018. You can comment on this proposal online at: https://federalregister.gov/d/2018-18377
A public hearing is scheduled in Washington, DC for November 5, 2018.
Why Is the IRS Doing This?
The backstory here is that at the end of 2017, congress passed the Tax Cuts and Jobs Act which among other things imposed a $10,000 cap on the federal income tax deduction taxpayers could take for payment of state and local taxes (SALT). A number of states came up with a workaround that allows taxpayers to circumvent the SALT cap by making charitable contributions to state funds to pay for public services (like schools). The states would then grant those taxpayers significant tax credits in exchange for those “donations”. Deductions for making charitable gifts are not subject to the $10,000 cap so this allows the taxpayer to exceed the new $10,000 cap by essentially turning a tax payment into a charitable gift.
The proposed IRS rule effectively puts an end to this tax avoidance scheme by requiring that any federal charitable deduction be offset by the value of the tax credits received (provided the credit amount exceeds 15% of the donation). While the IRS knew they were catching conservation tax credits up in this larger fight they hastily chose to use a one size fits all approach and reversed their own past guidance instead of taking the time to find a solution that specifically addresses the real problem at hand.
Conservation Easement Donations Are Different:
As described above, the IRS is rightfully trying to stop a tax avoidance scheme that has little to no public benefit. In contrast, voluntary conservation easement donations by private landowners to local, state, and national conservation organization have protected millions of acres of farm and forest land, natural habitat areas, recreation areas, and scenic views. The IRS has rushed the process of fixing these SALT cap workarounds and is using a clumsy approach to hurt longstanding state programs that benefit local communities.
In 2015, Congress has made it clear that they wanted conservation easement donations to be treated specially and actually enhanced the federal deduction available to conservation easement donors. This administrative rule making by the IRS is contrary to that special treatment that Congress authorized for conservation easement donations and it should not be adopted.
The IRS should find a way to specifically target state programs set up to circumvent the SALT cap and should not proceed with the proposed rule. If they do elect to proceed, the rule should be aligned with the clear direction of Congress and conservation easement donations under section 170(h) of the treasury regulations should be excluded from this new treatment.