The Department of the Treasury and the Internal Revenue Service (IRS) have recently released proposed regulations aiming to provide guidance under a new section of law. This new section disallows deductions for certain charitable conservation contributions made by partnerships and other pass-through entities.
The rules were added as part of the SECURE 2.0 Act of 2022, which introduced new subsections to the tax law that governs deductions for charitable contributions under Internal Revenue Code section 170.
Commenting on the development, IRS Commissioner Danny Werfel said, “The IRS is focusing its new compliance efforts on those who evade taxes through complex partnership structures and overvalued conservation easement contributions. The regulations issued today will stem the tide of certain syndicated conservation easements that are nothing more than retail tax shelters, while protecting the integrity of legitimate conservation easements and helping law-abiding taxpayers more easily meet their obligations.”
Generally speaking, these regulations affect partnerships and S corporations making conservation contributions, as well as upper-tier partnerships, upper-tier S corporations, partners, and S corporation shareholders allocated a portion of these contributions.
The regulations offer definitions, explanations, computational guidance, and examples of the new law. This law disallows deductions if the contribution’s amount exceeds two and a half times the sum of each partner’s or shareholder’s relevant basis in the partnership or S corporation.
Furthermore, the proposed regulations provide guidance on the statutory exceptions to the new disallowance rule. These include the exception for family partnerships and S corporations and the exception for contributions made outside a three-year holding period.
In addition, the proposed regulations also update the substantiation and reporting rules concerning certain charitable contributions. Ensuring that partnerships, other pass-through entities, and their owners comply with the tax law remains a significant part of the agency’s strategic plan.
This move represents a substantial step by the Treasury and the IRS in ensuring tax compliance, especially for those who may have used complex partnership structures to evade taxes. It underscores their commitment to maintaining the integrity of legitimate conservation easements while cracking down on misuse.
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