Taxpayers, including corporations, wishing to deduct the value of charitable contributions, as well as charitable organizations, should be aware of recent sweeping changes to the income tax law. The Pension Protection Act of 2006 was approved by both the House of Representatives and the Senate this summer and was signed into law by President Bush on August 17, 2006.
Among numerous other changes, this law revises certain charitable giving incentives and includes a number of charitable reforms. The new law reflects Congressional skepticism regarding appraisals of donated items and of donor advised funds and certain supporting organizations. The charitable giving incentives are only effective though the end of 2007. Other changes are permanent in their effect. The following is a brief summary of the various charitable provisions.
Charitable Giving Incentives
- Distributions from IRAs for Charitable Purposes — Up to $100,000 in distributions from a traditional individual retirement account (IRA) or a Roth IRA will be eligible for contributions to public charities. To qualify, the distribution must be made (i) on or after the date that the donor reaches the age of 70 1/2 years and (ii) directly to a (a) qualified charitable organization or (b) a donor-advised fund.
- Stock of S Corporation Contributing Property — A shareholder's basis reduction in S corporation stock, by reason of a charitable contribution made by such corporation, will be equal to the shareholder's pro rata share of the adjusted basis of the contributed property.
- Higher Deduction for Qualified Conservation Contributions — The charitable deduction limit is raised from 30% to 50% of adjusted gross income for qualified conservation contributions (or 100% for eligible farmers and ranchers); provided that such contribution does not prevent the use of the donated land for farming or ranching purposes. The deduction may be carried forward for 15 years, if the taxpayer is a farmer or rancher in the year of the carry-forward.
- Food Inventory Contributions — C corporations may receive a deduction for donations of food inventory equal to the lesser of (i) its basis plus one-half of the fair market value over basis and (ii) twice its basis.
- Book Inventory Contributions — C corporations may receive a deduction for donations of book inventory to elementary and secondary schools equal to the lesser of (i) the corporation's basis plus one-half of the fair market value over basis and (ii) twice the basis.
- Payments to Controlling Exempt Organizations — Rent, royalty, annuity, and interest income paid to a exempt organization by a controlled taxable subsidiary will not be treated as unrelated business income, and, accordingly, will not be taxable to the controlling exempt organization.
- Recordkeeping Requirements for Cash Charitable Contributions — With respect to a charitable contribution of cash, regardless of the amount, the donor must maintain (i) a cancelled check, (ii) bank record or (iii) receipt from the donee organization that shows (a) the name of the donee organization, (b) the date of the contribution and (c) the amount thereof.
- Clothing and Household Contributions — No deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better. In addition, the IRS may deny a deduction for any item deemed to have de minimis value.
- Fractional Interests in Donated Property — Charities that receive a fractional interest in an item of tangible personal property must take complete ownership thereof by the earlier of (i) 10 years or (ii) the death of the donor. Moreover, the donee organization must have (a) taken possession of the item at least once during the period of such fractional interest and (b) used the item for its exempt purpose. Failure to comply with these requirements will result in the recapture of all tax benefits plus interest and a 10% penalty.
- Recapture of Tax Benefit for Contributions of Exempt Use Property — All tax benefits derived from the contribution of property with respect to which a fair market value deduction was claimed may be recaptured if the property is not used for an exempt purpose of the donee organization.
- Information-Sharing with State Charity Officials — The IRS may disclose to state charity officials (i) information regarding organizations for which the IRS has denied or revoked tax-exempt status, (ii) certain actions taken by the IRS and (iii) returns filed by exempt organizations.
- Appraisal Reform — An accuracy-related penalty may now be imposed on any person who prepares an appraisal that is to be used to support a tax position if such appraisal results in a substantial or gross valuation misstatement.
- Notification Requirement for Exempt Organizations — Exempt organizations that do not have a current annual filing requirement because their gross receipts are less than $25,000 are now required to file an annual notice with the IRS containing basic contact and financial information.
- Facade Easements Contributions — A charitable deduction is allowed with respect to easements concerning buildings located in a registered historic district; provided that no portion of the exterior of the building may be altered in a manner inconsistent with its historical character. The donor must include a qualified appraisal and description of all current restrictions on development of such building with his or her tax return for the year of the contribution. In addition, the donor and the donee organization must enter into a written agreement certifying that (i) the donee is a qualified charitable organization, with a purpose of (a) environmental protection, (b) historic preservation, (c) land conservation and/or (d) open space preservation, and (ii) the donee organization has sufficient resources to enforce the restrictions. Such deduction will be reduced if a rehabilitation tax credit has been claimed with respect to the donated property.
- Private Foundation Net Investment Income Excise Tax — The definition of gross investment income is amended to include capital gains, notional principal contracts, annuities and other substantially similar investment income.
- Fines and Penalties — The amount of excise taxes applicable to certain activities between disqualified persons and certain exempt organizations is doubled.
- Life Insurance Contracts — Charitable organizations must report to the IRS certain acquisitions of interests in certain insurance contracts for a two-year period. The IRS will thereafter issue a report on whether the acquisitions of such insurance contracts are consistent with the tax-exempt purposes of such charitable organizations.
- Convention or Association of Churches — An organization that qualifies as a "convention or association of churches" does not need to file an annual return and is subject to certain other provisions generally applicable to churches. The definition of a "convention or association of churches" is clarified to state that such organization does not fail to so qualify merely because (i) the membership of the organization includes individuals as well as churches or (ii) individuals hold voting rights in the organization.
- Donor-Advised Funds and Supporting Organizations — An excess benefits tax will be imposed on any grant, loan, compensation or other similar payments from (i) a donor-advised fund to a person that with respect to such fund is a donor, donor adviser, or a related person and (ii) a supporting organization to a substantial contributor or a related person, unless such organization is functionally integrated with the exempt organization that it supports. In addition, the IRS will undertake a study on the organization and operation of donor-advised funds and of supporting organizations.
- Public Disclosure of Unrelated Business Income Tax Returns — Section 501(c)(3) organizations must make their unrelated business income tax returns (IRS Form 990-T) available for public inspection.
- Credit Counseling — Restrictions are imposed on organizations offering credit counseling services with respect to (i) loans, (ii) fees and (iii) solicitation of contributions from consumers receiving counseling.
- Taxidermy Property Contributions — The basis for donated taxidermy property is limited to the lesser of (i) basis or (ii) fair market value.
THE ABOVE ADVICE WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, BY YOU FOR THE PURPOSE OF (1) AVOIDING ANY PENALTY THAT MAY BE IMPOSED BY THE INTERNAL REVENUE SERVICE OR (2) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN. IF YOU DESIRE SUCH AN OPINION, PLEASE SO ADVISE.