This fall the Montana Land Reliance (MLR), held their second annual Greater Yellowstone Ag Forum in Three Forks, Montana. As part of their presentation, Kathryn Kelly of MLR walked farmers and ranchers through the IRS' new permanent tax incentives, which were passed in December 2015. As this year comes to a close many are executing this year's tax plans and making plans for 2017. The permanent tax incentives associated with conservation easements now available help landowners form their financial plans.
The conservation easement derived tax incentives are differentiated based on an individual's distinction of "qualified farmer / rancher." The basic test to determine whether or not one is a "qualified farmer or rancher" is based on the source of the tax payer's gross income. If the majority of a tax payer's gross income comes from the business of farming / ranching, then the individual is classified as a "qualified farmer / rancher." If the owner is a corporation, the underlying members have to individually qualify.
The tax incentives available for a "qualified farmer / rancher" are as follows:
- farmer / rancher can deduct up to 100% of Adjusted Gross Income (AGI) for 16 yrs (year of donation + 15 yrs) until the value of easement is used up
If the individual or individuals that comprise the corporation are not “qualified farmers / ranchers”, the IRS classifies them simply as a “land owner." The tax incentives available in this case are as follows:
- landowner can deduct up to 50% of AGI for 16 yrs (year of donation + 15 yrs) until the value of easement is extinguished
For both the "qualified farmer / ranch" and "land owner," the deductions are not subject to the Alternative Minimum Tax (AMT). Additionally, the IRS allows for the deduction of certain incurred easement costs (such as the appraisal and survey) in the year the easement is executed.
This year is the first in over 15 years that the tax incentives associated with conservation easements have been permanent. The permanency of the deductions translates to a reliability that allows landowners to make more informed strategic decisions and plan for the future of their farms and ranches with more certainty than in the past.
The IRC also provides estate tax exclusions in Sec 2031(c) of up to $500,000 for a ranch under easement if that ranch meets the requirements of a qualified conservation easement (QCE). In 2016, the estate tax is 40% of the amount above the exclusion.
In 2016, the basic estate tax exclusion amount for estates is $5.45M. That figure is rising to $5.49M in 2017.
For more information on the tax benefits of conservation easements, specifics on deductions of costs associated to the easement, QCE requirements and estate tax exclusions, consult your attorney and accountant.