The period for commenting on proposed Treasury regulations limiting the deductibility of charitable contributions for which a state or local tax credit is granted closed on Oct. 11. These proposed regulations limit the charitable deduction to the amount otherwise deductible in excess of any state or local tax credit granted as consideration for the contribution. The regulations would limit the effectiveness of recent efforts to circumvent the $10,000 SALT deduction cap and also affect longstanding credits in some states.
Among the many responses the IRS received that were critical of the proposed regulations was a letter from Rep. John Faso (R-N.Y.). He cautioned that, as proposed, the regulations “upend” the established deductibility of conservation easement donations in New York. New York is one of many states that provide tax credits for conservation easements donated to the state, local governments, or conservation organizations.
This state credit program provides a property tax credit equal to 25 percent of the real property taxes due on land subject to a conservation easement. The proposed regulations could limit the federal charitable deduction for granting such an easement to the amount otherwise deductible that exceeds the credit. Importantly, the regulations include a de minimis exception. Under this exception, a taxpayer’s charitable contribution deduction will not be reduced if the tax credit does not exceed 15 percent of the fair market value of property contributed. If only the credit taken in the year an easement is granted is required to be factored into this calculation, New York taxpayers would undoubtedly fall within this safe harbor, as only property taxes in excess of 60 percent of fair market value could result in a credit in excess of the 15 percent threshold. However, the regulations are silent on whether and how credits taken in subsequent years should be counted.
A number of other states also provide conservation incentives. For instance, under a New Mexico program, a taxpayer may claim a tax credit of $250,000 or 50 percent of the fair market value of land or an interest in land donated to a public or private conservation agency, whichever is smaller. With the potential for a much greater credit amount, the proposed regulations seem more likely to affect this program than New York’s. Notably, the regulations apply equally to contributions made to entities not affiliated with the state or local government granting the credit. Treasury has scheduled a Nov. 5 hearing on the regulations.
Would the proposed regulations affect an incentive similar to New York’s that provides a partial property tax exemption for conservation-restricted property instead of a credit? Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn.
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