By Karen Dunn, JD, LLM
The Protecting Americans from Tax Hikes Act of 2015 (PATH), signed into law December 18th, contains some very favorable provisions affecting charities. Some of these provisions provide permanent extensions and some are new administrative procedures. This article focuses on the permanent extensions affecting charities. However, stay tuned, as next month we will cover some of the new administrative provisions.
Tax-free IRA Charitable Distributions (up to $100,000 per year)
The biggest win for charities in PATH is the provision that made permanent the tax-free IRA distribution to charities. The provision allows taxpayers to exclude up to $100,000 per year from their taxable income when a charitable contribution is made from a traditional or Roth IRA. To qualify:
(1) the distribution must be made directly by the IRA trustee to a public charity (not a supporting organization or donor advised fund);
(2) the IRA owner must be at least 70 ½ years old; and
(3) the entire distribution must be deductible under the normal charitable deduction rules.
The exclusion is allowed only to the extent the distribution would otherwise have been includible in gross income.
Enhanced Charitable Deduction for Food Inventory
PATH makes permanent the enhanced deductions for donations of food inventory. It also increases the percentage limitations (from 10% of the donor’s taxable income, to 15%) for such donations made in taxable years beginning after December 31, 2015. Any excess can be carried forward for five years. The increased deduction equals:
(a) the basis of items donated; plus
(b) one-half of the ordinary income that would have been realized if the items were sold at their fair market value (FMV) at the time of the donation.
This deduction cannot exceed twice the donor’s basis in the donated item(s). The new law also provides guidance on determining basis and fair market value in certain specific circumstances.
Several rules apply to be eligible for a charitable deduction. The food must be in the taxpayer’s inventory, only “apparently wholesome food,” and contributed to a charity (except for non-operating private foundations). The fair market value of the food must exceed its basis. The recipient charity must use the food for its exempt purpose or solely for the care of the ill, the needy, or infants. The food must not be subsequently sold and the charity must provide the taxpayer with a written statement that the use will follow these rules.
S Corporation Charitable Contribution Basis Adjustment
S corporations have historically been at a disadvantage when making charitable donations of appreciated property. When donations are made, shareholders must reduce their stock basis by the fair market value of the donated property. Owners of partnerships, on the other hand, are only required to reduce their basis by the adjusted basis in the donated property. In 2006, the law was changed to create consistency and allow the shareholder’s stock basis to only be reduced by his or her share of the S corporation’s adjusted basis in the contributed property. However, this provision expired in 2014. PATH brings back this provision and makes it permanent.
Enhanced Qualified Conservation Contributions
In general, gifts of appreciated capital assets, such as real estate, are limited to 30% of the donor’s adjusted gross income (AGI), while gifts of cash are limited to 50%. Any donations in excess are allowed a 5 year carryover. The enhanced qualified conservation contribution rules allow donors of qualified conservation interests to deduct up to 50% of their AGI and carry forward any excess contribution for 15 years. PATH made this rule permanent.
Farmers and ranchers have an even more favorable rule. Qualified farmers and ranchers are allowed a deduction of up to 100% of AGI when making a qualified conservation contribution. Any excess carries forward for 15 years. PATH made this provision permanent as well.
Payments to a Controlling Organization
Under IRC Sec. 512(b)(13)(A), certain “specified payments” (interest, rents, royalties, and annuities) paid to a controlling tax-exempt organization are included in the controlling organization’s unrelated business income (UBI) to the extent the payment reduces the net unrelated income or increases any net unrelated loss of the controlled entity.
However, the Pension Protection Act of 2006 created an exception for “qualifying specified payments.” “Qualifying specified payments” are defined as payments made under a binding written contract in effect on August 17, 2006 (or a renewal of a binding written contract on substantially similar terms in effect on August 17, 2006). Such “qualifying specified payments” will not be taxable if the payments are at or below fair market value. If the payment exceeds fair market value (determined by the payment amount in an arm’s length transaction between unrelated parties), the excess is UBI and subject to a 20% penalty.
While this article summarizes some permanent extender provisions, this is not a comprehensive list. Many of these provisions have specific requirements for qualification. Please consult your tax advisor for more information. Also, please look for next month’s Part II on the PATH provisions that affect tax exempt organizations, which includes information on the new mandatory notification requirements for organizations exempt under 501(c)(4).
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