IRS and Treasury Issue Proposed Regulations on Conservation Easement Deduction Disallowance

November 17, 2023

The U.S. Department of the Treasury and the IRS recently issued proposed regulations that provide guidance under a new section of the law that disallows deductions for certain charitable conservation contributions by partnerships and other pass-through entities.

The SECURE 2.0 Act of 2022 added new subsections to the part of the tax law that provides rules for deductions for charitable contributions under Internal Revenue Code section 170.

Generally, these regulations affect partnerships and S corporations that make conservation contributions and upper-tier partnerships, upper-tier S corporations, partners and S corporation shareholders that are allocated a portion of these contributions. The regulations provide definitions, explanations, computational guidance and examples of the new law, which disallows deductions if the amount of the contribution is more than two-and-a-half times the sum of each partner's or shareholder's relevant basis in the partnership or S corporation.

The proposed regulations also provide guidance on the statutory exceptions to the new disallowance rule, particularly the exception for family partnerships and S corporations and the exception for contributions made outside a three-year holding period. The proposed regulations also provide updates concerning substantiation and reporting rules for certain charitable contributions.