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Pension Protection Act of 2006 increases tax benefits for qualified conservation contributions

The qualified conservation contribution (QCC) provides a useful avenue for you to complement your estate planning goals with a desire to promote conservation. The Internal Revenue Code (the Code) provides an income tax deduction equal to the fair market value of the property contributed for a conservation purpose. Due to recently enacted legislation, which gives QCCs more favorable treatment than ordinary charitable contributions, more people may now consider QCCs a great charitable giving technique.

The Code defines QCCs as contributions of a qualified interest in real property to a governmental unit or certain charitable organizations for the exclusive purpose of conservation. A “qualified interest in real property,” in this sense, can be the entire property interest of the donor, a remainder interest in the property, or a perpetual restriction on the use of the real property (commonly termed a conservation easement). Generally, the “conservation purpose” element of a QCC is satisfied when the contribution is made for the preservation of land for outdoor recreation or education, the protection of ecosystems and certain open lands, or the preservation of historic real property.

Prior to the enactment of the Pension Protection Act of 2006 (the Act) on August 17, 2006, QCCs were treated the same as all other charitable contributions. Therefore, QCCs of capital gain property were limited to a deduction equal to the fair market value of such property, up to 30% of your contribution base, which is essentially your adjusted gross income. If you contributed non-capital gain property or made a special election to only deduct the adjusted basis of the capital gain property contributed, the Code allowed a deduction of 50% of the contribution base. All charitable contributions, including the QCCs, which were in excess of the respective percentage limitation could be carried forward to the five years succeeding the year of contribution.

The Act made significant changes to the treatment of QCCs made this year and last. According to the new provisions of the Code, you may deduct the aggregate amount of all such QCCs that do not exceed the excess of 50% of your contribution base over all other charitable contributions allowed. Therefore, any capital gain property contributed as a QCC in 2006 and 2007 is subject to the 50% imitation rather than the 30% limitation, which is applicable to all other charitable contributions of capital gain property.

Congress also used the Act to establish a more favorable carryover period for all QCCs. Unlike the five year carry-forward provisions that are available for all other charitable contributions, the new legislation allows QCCs made this year to be carried forward for 15 years after the year of the contribution. While the Act only applies to current year QCCs made in 2006 and 2007, such contributions receive the same special treatment throughout the carryover period.

The order in which the deductions for contributions are taken is quite important in taxable years where you make both QCCs and other charitable contributions. The basic rule is that other charitable contributions are accounted for first, irrespective of the QCCs. After you account for all other charitable contributions and apply their respective percentage limitations, the QCCs are deducted according to their own percentage limitations.

The ordering provisions set forth in the new rules are very favorable. Since the other charitable contributions, which have a carryover period of only five years, are deducted before any QCCs, you are more likely to have an excess of QCCs, which have a carryover period of fifteen years. This provision increases the likelihood that you will be able to deduct all of the charitable contributions made in the 2006 and 2007 taxable years.

QCCs made in 2006 and 2007 by individuals and closely held corporations, which qualify as farmers or ranchers under the tax law, receive even more favorable treatment under the Act. A taxpayer qualifies as a farmer or rancher if 50% of the taxpayer’s gross income for the taxable year is generated through farming or ranching activities. As an individual farmer or rancher who makes a QCC, you are allowed a deduction of up to 100% of the excess of your contribution base over the amount of all other allowable charitable contributions, instead of the 50% available to ordinary taxpayers. Closely held corporations that are qualified farmers or ranchers may deduct up to 100% of the excess of a special calculation of the corporation’s taxable income over the amount of all other allowable charitable contributions. The QCCs made by farmers and ranchers in the taxable years 2006 and 2007 also receive the 15 year carryover period available for all other QCCs.

While contributions made by farmers and ranchers receive more favorable treatment, a special limitation applies to any QCC they make after August 17, 2006. After that date, any property that is used or is available for use in agriculture or livestock production must be contributed with the restriction that it continue to be available for such use. Absent such a restriction, the contribution will be subject to 50% limitation applicable to QCCs made by ordinary taxpayers.

QCCs continue to be a great method of preserving real property for use by future generations. Those contributions are now more enticing, due to the favorable tax treatment available. When making tax planning decisions for the remainder of 2007, do not forget about the QCCs, which allow you a sizeable deduction and the opportunity to ensure the continued enjoyment of your real property for years to come. QCC’s often take a long period to create, so you need to start right away to complete your QCC by year end.§

  • Partner

    John is Chair of the firm's Estate Planning Department. He also leads the firm's Senior Partner Committee, and is a member of the firm's Finance Committee. John, a former Certified Public Accountant, began his career in the tax ...

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