General Assembly Places Limits on Land Preservation Tax Credit

With the usual budget troubles brewing in Richmond, the land preservation tax credit (LPTC)—a transferable credit that results usually from either a donation of land or a donation of a conservation easement—has once again become the target of much scrutiny by lawmakers. Of the several bills that were introduced to limit the land preservation tax credit, two of these bills have now passed the full General Assembly. These bills, Senate Bill 1019 and House Bill 1828, were both finally approved by the General Assembly on Wednesday, February 18, 2015 and are now en route to the Governor for signature. Let’s examine Senate Bill 1019 and House Bill 1828 and how they will likely change land preservation efforts in Virginia.

The New Limitations on the Land Preservation Tax Credit

Senate Bill 1019 and House Bill 1828, which are identical, will limit the land preservation tax credit in three main ways. All of these changes are intended to be incorporated into Section 58.1-512 of the Code of Virginia. Let’s look at those changes in depth.

Stricter Limits on Individual Usage of the Land Preservation Tax Credit

First, the new legislation will further limit the amount of tax credit that any particular taxpayer may claim in a given year. These limits will decrease to $20,000 for Tax Year 2015, $20,000 for Tax Year 2016, and $50,000 for each tax year thereafter. Compare this proposal with the corresponding limits for an individual taxpayer in preceding tax years:

Although the proposed $50,000 limit for Tax Year 2017 and later is not without precedent, the sharp drop from $100,000 in Tax Year 2014, to $20,000 in Tax Year 2015, is quite a change from previous years.

The legislation compensates for this steep reduction somewhat by extending the period during which a taxpayer may carry over any unused tax credits by three years—from ten years following the tax year in which the credit originated to thirteen years following the tax year in which the credit originated. This extension applies only to taxpayers affected by the reduced limits. In other words, taxpayers who would not be assessed at least $20,000 or $50,000 (depending on the year) in Virginia income taxes before applying the credit would still be limited to a carry-over period of ten years.

However, the two bills leave the annual individual limit at $100,000 for tax credits resulting from outright donations of land to the Commonwealth of Virginia taking place on or after January 1, 2015. Donations of conservation easements do not qualify for this very narrow exception.

Stricter Caps on the Overall Tax Credits Issued Statewide

Secondly, the new legislation will cap the statewide amount of credits that may be issued in a given calendar year at $75 million. This contrasts with the $100-million cap that applied for calendar year 2014. As is the case under current law, any applications to register tax credits that are processed after that year’s cap is reached will be issued for the following year.

Under the new legislation, the cap that will apply to any given taxpayer will be the cap for the calendar year in which the application to register the tax credits is filed. This contrasts with current law, under which the cap during the calendar year of the donation applies.

The new legislation also clarifies that, for purposes of registering tax credits, the postmark on the application package will count as the date of filing.

New Filing Deadlines for Claiming Tax Credits

Finally, the new legislation will limit the period of time in which the taxpayer has to register his credits. For donations taking place on or after July 1, 2015, the taxpayer will be required to file the application to register his tax credits (Form LPC-1) with the Virginia Department of Taxation no later than December 31 of the calendar year following the donation. For example, if a taxpayer donated a conservation easement on December 30, 2015, the taxpayer would be required to file the application no later than December 31, 2016. Under current law, there are no specific time limits on when a taxpayer may file his tax credit application, aside from the general three-year statute of limitations relating to the filing of tax returns.

Looking to the Future of Land Preservation in Virginia

I had previously speculated that Governor McAuliffe’s recent reaffirmation of his goal to preserve 400,000 acres by 2018 might signal increased political support for land preservation incentives like the land preservation tax credit. In this case, however, a veto from the Governor is unlikely: The impact statement for Senate Bill 1019 written by the Department of Taxation indicates that the Governor’s proposed budget already provides for spending the $22.4 million in positive annual revenue impact that the bill is anticipated to generate in Fiscal Years 2016 and 2017 and that, if the bill does not pass, the Governor’s proposed budget will need to be adjusted accordingly. Therefore, Senate Bill 1019 and House Bill 1828 almost certainly will be signed into law by the Governor.

The General Assembly’s—and, it seems, Governor McAuliffe’s—desire to locate additional revenue sources in the current economy is understandable, but the particular way in which they have chosen to do so will likely slow the pace of land preservation in Virginia. After all, the purpose of the land preservation tax credit is to provide an incentive to landowners to preserve their land, either by outright donation of the land or by donation of a conservation easement, and any restrictions on the tax credit will necessarily reduce that incentive.

First, the reduced cap on the overall amount of tax credits that may be issued per year will restrict how many landowners will be able to receive tax credits in a given year. Put another way, the reduced cap will restrict how much land can be preserved in a given year and still generate tax credits in that same year. Although landowners who do not receive tax credits in one year because of the reduced cap will simply receive tax credits for the following year, landowners who are trying to time their donations so as to offset significant income occurring in a certain year can incur serious tax liabilities if their tax credits are not available for that specific tax year. The greater uncertainty created by the reduced cap might lead these landowners to consider other means of offsetting income that do not involve land preservation.

Likewise, the stricter limit on an individual’s usage of the tax credits in any given year will disincentivize landowners with significant income who might be able to use the tax credits for themselves. The effect of this stricter limit on landowners with less income—who often sell their tax credits to others—remains to be seen, although I have heard speculation in the land preservation community that this lower individual limit might adversely affect tax credit prices.

Certainly, one hopes that a landowner’s primary motivation for either donating land outright or donating a conservation easement is always going to be a desire to preserve the land, but my experience is that the desire to obtain tax benefits typically plays a strong role as well. And this new legislation has great potential to dampen that desire.

Nevertheless, the land preservation tax credit appears to have survived this year’s General Assembly largely intact, even if noticeably reduced. It is important to remember that the land preservation tax credit, in whatever form, continues to provide landowners in Virginia with a powerful incentive to preserve their land that landowners in most other states do not have.

Until, perhaps, next year’s General Assembly. Stay tuned.