Federal Reporting of Purchased Tax Credits

Home Fairmark Forum Other Tax Topics Federal Reporting of Purchased Tax Credits

Viewing 1 post (of 1 total)
  • Author
    Posts
  • #14499
    ReachELS
    Participant

    Here in VA, there is a market for Conservation Easement Tax Credits which can be applied against VA tax liabilities. While the VA tax treatment of these credits seems fairly straightforward, the Federal treatment is anything but. My CPA sources are quite contradictory. I am hoping that someone who has had prior experience in this area can shed some light.

    My confusion is best illustrated with an example:

    Assume that I:
    1. Bought $50k worth of credits for $45k (10% discount).
    2. Will have a $30k VA tax liability for 2020
    3. Have no VA taxes withheld

    Option 1
    One source states that I apply $30k of the credit to offset the 2020 VA tax liability and report a $3k STCG (10%) in 2021. The $30k qualifies as a state tax payment for federal purposes (not clear whether 2020 or 2021 tax year). I later apply the remaining $20k credit against my 2021 VA tax liability and report $2k LTCG (10%) in 2022. The $20k qualifies as state tax payment for federal tax purposes (2021 or 2022?)

    Option 2
    Another says that I apply $30k of the credit to offset the 2020 VA tax liability but rather than claim a STCG, deduct $27k as a state tax payment on the federal return (again, not clear in which tax year). I later apply the remaining $20k credit against my 2021 VA tax liability and deduct remaining $18k is claimed as a state tax payment on my federal return (2021 or 2022?) return.

    Option 3
    The last source suggests that I apply $30k of the credit to offset the 2020 VA tax liability and deduct the entire $45k in the year in which is was paid – 2020. I later apply the remaining $20k credit against my 2021 VA tax liability.

    Lots of moving parts – CG or no? And, what tax year? Amount of state tax payment on federal return? And, what year?

    I don’t buy option 3 as I did not pay VA for the tax credits but rather a landowner who elected to sell them. I prefer option 2 as I avoid paying CG taxes. Which makes me think that option 1 is the proper treatment.

    This may well require a consulting visit to a local CPA firm but I thought that I’d throw this out just in case someone can relate.

    I apologize in advance for the length of this post.

    John

Viewing 1 post (of 1 total)
  • You must be logged in to reply to this topic.