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Revenue Administrative Bulletin 2021-26

REVENUE ADMINISTRATIVE BULLETIN 2021-26

 

Approved:   December 29, 2021

 

 INDIVIDUAL INCOME TAX AND MICHIGAN BUSINESS TAX

FARMLAND PRESERVATION TAX CREDIT ELIGIBILITY

 

Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury after September 30, 2006 and shall not be penalized for that reliance until the bulletin is revoked in writing.  However, reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which the bulletin is based.

 

RAB 2021-26. This Revenue Administrative Bulletin (RAB) describes the farmland preservation tax credit eligibility requirements for individuals under the Michigan Income Tax Act (MITA)[1] and corporations, fiduciaries, and other entities under the Michigan Business Tax Act (MBTA).[2]

 

LAW AND ANALYSIS

 

A. Farmland Preservation Agreements and Easements

 

Under Part 361 of the Natural Resources and Environmental Protection Act[3] an owner may restrict land use and development through an agricultural conservation easement, also known as a purchase of development rights (PDR),[4] a development rights agreement (Agreement), or a development rights easement.[5] The purpose of an Agreement or PDR is to ensure that farmland[6] remains in agricultural use.[7] The Michigan Department of Agriculture and Rural Development (MDARD) or the local governing board may execute and accept an Agreement or PDR.

 

Agricultural Conservation Easement: In an agricultural conservation easement, or PDR, the farmland owner continues to own the real property. In this permanent easement, the State of Michigan holds the development rights, and the property is restricted in perpetuity. The owner makes a covenant running with the land - in other words, a covenant that exists regardless of the transference of the land - not to undertake development.  A qualifying property subject to a PDR is eligible for the farmland preservation tax credit.

 

Development Rights Agreement: Under a development rights agreement, the farmland owner continues to own the real property.  Property subject to such an agreement is also known as PA 116 enrolled property.  Under an Agreement, the State of Michigan holds the development rights.  Agreements have a minimum term of 10 years and maximum term of 90 years, including extensions.[8]  Property owners subject to an Agreement may be eligible for a farmland preservation credit.

 

Development Rights Easement: Development rights easements include two types of easements: a local open space easement and a designated open space easement. These types of easements are not eligible for a farmland preservation tax credit and will not be discussed in this RAB.   

 

B. Farmland Preservation Tax Credit

 

In exchange for the restrictions on development through a PDR or an Agreement, the property owner may receive a tax credit under the MITA, or under the MBTA[9] for certain trusts, estates, and corporations.  To qualify for a credit, the claimant must have executed a PDR with the State or to a local governing board or be listed as an owner on an enrolled Agreement with MDARD or the local governing board.  An "owner"[10] must be a "person," defined as "an individual, corporation, limited liability company, business trust, estate, trust, partnership, or association, or 2 or more persons having a joint or common interest in land."[11]

 

  1. Tax credit under the MITA.  An individual may claim the credit by filing a Michigan income tax return along with a Farmland Preservation Tax Credit Claim and the Schedule of Taxes and Allocation to Each Agreement.[12]  The calculation of household income for the tax credit begins with total household resources.[13] Claimants file a Michigan Homestead Property Tax Credit Claim[14] or Michigan Home Heating Credit Claim[15] only for the purpose of reporting total household resources. Total household resources are then reduced by losses from farming, business, rentals, or royalties and the lesser of a federal net operating loss or federal modified taxable income to arrive at "household income."

 

For individuals, the credit is the amount by which total property taxes on all land and structures used in farming operations, including the homestead, covered by all the restrictive Agreements exceed 3.5 percent of the household income.[16] The farmland preservation tax credit will be included in the calculation of household income for the year received.[17]

 

  1. Tax credit under the MBTA.  Certain trusts, estates and corporations may claim a credit under the MBTA.[18]  For purposes of the MBTA, "corporation"[19] means a taxpayer that is required or has elected to file as a corporation under the Internal Revenue Code (IRC).

 

A credit may be claimed for the amount by which the property taxes on the land and structures used in farming operations, restricted by Agreements or PDRs, exceed 3.5% of the "business income tax base" of the owner as defined in MCL 208.1201, plus compensation to shareholders not included in the business income tax base.[20]

 

C. Tax Credit Eligibility: New Agreement and Successor in Title

 

1.      New Agreement.

 

a.       Individuals. A tax credit may be claimed based on a new Agreement or PDR held by an individual, an individual who is a partner in a partnership, a shareholder of a subchapter S corporation, a member of a limited liability company, the grantor of a trust under IRC 671 to 679,[21] or other individual who is permitted to claim the tax credit under the MITA.  

 

b.      Trusts. A trust that owns farmland and enters into a new Agreement or PDR for farmland preservation but does not have an individual grantor or a beneficiary who can claim the credit under the MITA and is not currently an MBT taxpayer[22] may not claim a tax credit under the MBTA because an election[23] to file under the MBTA must have been made in the first tax year after December 31, 2011.

 

c. Corporations.  An election to file under the MBTA must have been made in the taxpayer's first tax year ending after December 31, 2011.[24].

 

2. Successor in title. If farmland subject to an Agreement or PDR is transferred, the successor in title may be able to claim the tax credit if the use of the land complies with the Agreement or easement.[25] 

 

a.       Individuals. An individual may claim a tax credit under the MITA, as successor in title to farmland subject to an Agreement, if the individual receives title directly from any person, including a corporation or an estate, or is a partner in a partnership, a shareholder of a subchapter S corporation, a member of a limited liability company, or a grantor trust under IRC 671 to 679 that is a successor in title.  

 

b.      Trusts and Estates: successor to a decedent.  A trust or an estate that is the successor to a decedent who died after December 31, 2011, and who had claimed the tax credit in a previous year under the MITA, may claim the tax credit under the MBTA.[26]  To retain eligibility, the tax credit must be claimed in the first year that the trust or estate is eligible to file under the MBTA.  The taxpayer must file a return and pay under the MBTA until either the credit is complete and used up or the taxpayer no longer owns the property subject to the Agreement, whichever occurs first.[27] 

 

c.       Trusts: successor to existing person.  If a trust is the successor in title to farmland that is subject to an Agreement or a PDR but the trust is not the successor of a decedent, the trust may not claim a tax credit under the MBTA unless it had filed under the MBTA beginning with its first tax year after December 31, 2011.[28] Therefore, a trust must have filed a return under the MBTA for its first tax year ending after December 31, 2011, and for each year thereafter and claim the tax credit as a successor in title until either the credit is complete and used up or the taxpayer no longer owns the property subject to the Agreement, whichever occurs first.

 

d.      Corporations and UBGs.  A corporation or a unitary business group (UBG)[29] claimant may file under the MBTA to claim the tax credit as a successor in title provided that the successor corporation, or the UBG in which the successor corporation is a member, had filed an MBTA return beginning with its first tax year ending after December 31, 2011. The successor corporation or UBG must also file a return under the MBTA for each year thereafter and claim the tax credit as a successor in title until either the credit is complete and used up or the taxpayer no longer owns the property subject to the Agreement, whichever occurs first.[30]

 

 

[1] 1967 PA 281, MCL 206.1, et seq.

[2] 2007 PA 36, MCL 208.1101, et seq.

[3] MCL 324.101, et seq., is also referred to as NREPA.  Part 361, MCL 324.36101 to 324.36117, contains the requirements for property to qualify for the program under the NREPA.

[4] A purchase of development rights results in an agricultural conservation easement. A purchase of development rights and a donation of development rights are two methods of creating an agricultural conservation easement. In this RAB, both are referred to as a PDR.

[5] MCL 324.36101(a) defines agricultural conservation easement; MCL 324.36101(f) defines development rights agreement; MCL 324.36101(g) defines development rights easements.

[6] MCL 324.36101(h) defines farmland

[7] MCL 324.36101(b) defines agricultural use.

[8] MCL 324.36103.

[9] MCL 324.36109.

[10] "Owner" means a "person having a freehold estate in land coupled with possession and enjoyment."  MCL 324.36101(l).

[11]  MCL 324.36101(n).

[12]  Respectively, MI-1040, MI-1040CR5 and Schedule CR5.

[13]  MCL 206.508(4).

[14] Form MI-1040CR or Form MI-1040CR2.

[15] MI-1040CR-7.

[16] MCL 324.36109(1). "Property taxes" mean "general ad valorem taxes levied after January 1, 1974, on lands and structures in this state, including collection fees, but not including special assessments, penalties, or interest." MCL 324.36101(q).

[17] MCL 206.508(4)(c).

[18] MCL 208.1107(1), 208.1500(1); MCL 206.680 collectively provide that "'certificated credit' means that term as defined in section 107 of the Michigan business tax act, 2007 PA 36, MCL 208.1107." MCL 208.1107(1)(g) defines "certificated credit" to include "[a] credit applicable to this act granted under section 36109 of the natural resources and environmental protection act, 1994 PA 451, MCL 324.36109."

[19] MCL 208.1107(4).

[20] MCL 324.36109(2).

[21] 26 USC 671 to 26 USC 679.

[22] MCL 208.1117(5).

[23] MCL 208.1107, MCL 208.1500, MCL 206.680.

[24] Id.

[25] MCL 324.36110(1).

[26] MCL 208.1500(8).

[27] Ibid.

[28] MCL 208.1500(1).

[29] "Unitary business group" means a group of United States persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons, and that has business activities or operations which result in a flow of value between or among persons included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. For purposes of this subsection, flow of value is determined by reviewing the totality of facts and circumstances of business activities and operations.  MCL 208.1117(6).

[30] Beginning January 1, 2012, "taxpayer" means in pertinent part a person or unitary business group that has been approved to receive, has received, or has been assigned a certificated credit and that elected under section 680 of the income tax act of 1967, 1967 PA 281, MCL 206.680, to file a return and pay the tax imposed under this act, if any. Except as otherwise provided under section 500(7), if a person or unitary business group that elects under section 680 of the income tax act of 1967, 1967 PA 281, MCL 206.680, to file a return and pay the tax imposed under this act is part of a unitary business group as defined under this act, the unitary business group as defined under this act shall file the return and pay the tax, if any, under this act. MCL 208.1117(5).