|
June 7, 2008 ( PowerHomeBiz
) - Columbia, SC, USA --
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.
(news continued below)
“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.
Please keep in mind that these rules are complicated and that a taxpayer
should not make a decision without first contacting their tax advisor. Log
on to
www.businessvaluationconsultants.com for other business valuation
tips.
Contact information:
Frank D. Thomas (803-665-2256) or
Jamin McCallum (803-238-9495)
info@aecg.biz
|
