Recent law change may help business owners reduce the value of their business for estate tax purposes while lowering income taxes.
Recent legislation has enhanced the tax advantages of conservation easements. Placing a conservation easement on property can potentially help business owners save hundreds of thousands of dollars of tax while helping preserve our country's natural resources.


    /South Carolina News Articles/ - COLUMBIA, SC, June 08, 2008 - Business owners often seek to reduce their potential estate tax liability by implementing strategies to lower the value of their business. Conservation easements were created by congress to help preserve our country's natural resources. The recently enacted Heartland, Habitat, Harvest and Horticulture Act of 2008 expanded the estate and income tax advantages of conservation easements that can be used as part of a business succession plan. Placing a conservation easement on property can help reduce the value of your business for estate tax purposes while creating income tax deductions related to the charitable contribution of the easement. The new rules have increased the percentage that is deductible and also increased the number of years that excess deductions can be carried over.

"Conservations easements are typically placed on property that you wish to keep in the family and do not ever intend to develop," said Frank Thomas, CPA, CVA.

Example: A business owner, who has a taxable estate, owns a business whose primary asset is a 100 acre farm with a fair market value of $3,000,000. Placing a conversation easement on the property restricts the ability of the owner to develop the land and reduces the fair market value of the business. If the value of the business was reduced by the easement from $3,000,000 to $1,500,000, the estate tax savings would be $675,000 ($1,500,000 x 45%).

"In addition to reducing estate tax, the owner receives a current income tax benefit by being able to deduct the $1,500,000 reduction in value as a charitable contribution on their individual income tax returns, if the easement was donated to a qualified charity or certain government entities," said Thomas.

The old rules limited the amount that the individual could deduct annually to 30% of their adjusted gross income (AGI). Continuing the above example, if a taxpayer had a $1,500,000 charitable contribution but AGI of $200,000, they could only deduct $60,000 in the year of the contribution. The old rules allowed you to carry-forward unused charitable contribution deductions, but only for five years. Under the old rules, the taxpayer would only be allowed $360,000 in income tax deductions ($60,000 in the 1st year and $60,000 in each year of the following 5 years). The remaining balance of $1,140,000 would be lost due to the carry-forward limitation.

The new rules are more favorable. The first change raises the AGI limit from 30% to 50%. In our example of a taxpayer with a $200,000 AGI, they would be allowed a deduction of $100,000 ($200,000 X 50%) in the first year. The second change is that the unused amount can be carried forward up to 15 years instead of 5 years. Continuing the above example, under the new law, a business owner could potentially deduct the entire $1,500,000 amount before the carry-forward period expires.

"The new rules greatly enhance the income tax benefits of using a conservation easement as a valuation tool to reduce estate tax and still retain the family's assets. When combined with the potential estate tax savings, this strategy provides a very powerful estate and income tax planning tool," said Thomas.

"The income tax savings can be used to purchase life insurance through an Irrevocable Life Insurance Trust (ILIT), which can escape estate tax if properly structured. The insurance proceeds can be used to replace the value lost by the contribution of the easement," Thomas said.

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Press Release Contact Information:

Frank Thomas
Business Valuation Consultants
Partner; CPA
220 Stoneridge Drive, Suite 402
Columbia, South Carolina
United States 29210-8018
Voice: 803-665-2256
Fax: 803-771-0770
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