Charitable Giving Incentives
The Pension Protection Act of 2006 contains provisions designed to encourage charitable donations, including the following:
Tax-free distributions from IRAs are allowed for charitable purposes through 2007. A taxpayer who has reached age 70-1/2, may exclude from gross income certain distributions (up to $100,000) from either a traditional IRA or a Roth IRA which would otherwise be included in the taxpayer’s income. However, the charitable distribution must be made to a tax-exempt organization and this special rule is only available through 2007.
Donations of food inventory may yield a charitable deduction. An enhanced deduction for donations of food inventory available only to C corporations is now extended to all trades and businesses through 2007.
Basis adjustments for S corporation charitable donations have been clarified. If an S corporation makes a charitable donation of appreciated property for tax years beginning in 2006 and 2007, the shareholder must reduce his or her stock basis by the shareholder’s pro rata share of the contributed property’s adjusted basis and not its fair market value. For example, if an S corporation with one individual shareholder makes a charitable contribution of stock with a basis of $200 and a fair market value of $500, the shareholder will be treated as having made a $500 charitable contribution and will reduce the basis of the S corporation stock by $200. The provision is effective through 2007.
C Corporations may receive a charitable deduction for contributions of book inventory to public schools. Public schools are eligible donees of book inventory contributions by C corporations through 2007. The contributions should yield an enhanced charitable deduction.
The tax treatment of certain payments to controlling exempt organizations has changed. Prior to 2006, rent, royalty, annuity, and interest income paid to a tax-exempt organization by a controlled taxable subsidiary was generally treated as unrelated business income, taxable to the tax-exempt parent organization. As of 2006 and extending through 2007, only the portion of such payments which is not regarded as fair market value will be treated as unrelated business taxable income. However, exempt organizations are required to report certain amounts received from controlled organizations.
The limit on deduction qualified conservation contributions has increased. The limit on deducting qualified conservation contributions of capital gain property by individuals has increased from 30% of adjusted gross income to 50%. For individual and corporate farmers and ranchers, the charitable deduction limit has increased to 100%, so long as the contribution includes a restriction that the land remain available for farming or ranching. Unused contributions can be carried forward for up to 15 years. These changes are effective through 2007.
The Pension Protection Act of 2006 also contains new requirements and restrictions on donors and exempt organizations, including the following:
Reporting is required for life insurance contracts. The Treasury Department must now receive reports relating to certain life insurance contracts.
Some activities may be subject to increased fines and penalties. The Act has doubled the fines and penalties applicable to certain activities by charities, social welfare organizations, private foundations and exempt organization managers.
Donations of taxidermy property has been limited. The basis for donated taxidermy property has been limited to the cost of preparing, stuffing and mounting an animal. Moreover, the value of the deduction is equal to the lesser of basis or fair market value.
The recapture of tax benefits for impermissibly used property may be required. A taxpayer must recapture any tax benefit derived from the contribution of property with respect to which a fair market value deduction was claimed if the property is not used for an exempt purpose of the donee organization. This change is effective only for contributions made after September 1, 2006.
Deductions of clothing, household items, and items of minimal monetary value may be prohibited. Deductions for contributions of clothing and household items may be prohibited, unless they are in good used condition or better. The IRS may also deny a deduction for any item with minimal monetary value. However, these rules are effective only for contributions made after August 17, 2006 and do not apply to any contribution of a single item of clothing or a household item for which a deduction of more than $500 is claimed so long as the taxpayer includes with his return a qualified appraisal for the donated property.
Donors must now maintain an adequate record of charitable contributions. In the case of a charitable contribution of money, regardless of the amount, the donor must maintain a cancelled check, bank record or receipt from the donee organization showing the name of the donee organization, the date of the contribution, and the amount of the contribution. This rule is effective for contributions made in tax years beginning after August 17, 2006.
Donations of fractional interests are subject to special rules. Donors contributing a fractional interest in an item of tangible personal property to a charity must contribute their remaining interest in the item to the same charity. Further, the donee charity must take complete ownership of the item within 10 years or at the death of the donor, whichever occurs first. Finally, the donee must have (i) taken possession of the item at least once during the 10-year period as long as the donor remains alive, and (ii) used the item for its exempt purpose. Failure to comply with these requirements may result in the donor’s recapture of all charitable deductions claimed for fractional interest gifts of the item plus interest and the imposition of a 10% penalty. The change is effective for contributions, bequests, and gifts made after August 17, 2006.
The threshold for imposing accuracy-related penalties has changed. The threshold for imposing accuracy-related penalties on a taxpayer who claims a deduction for donated property for which a qualified appraisal is required has been lowered.
Certain requirements are imposed on organizations offering credit counseling. Tax-exempt organizations that offer credit counseling services may have to comply with new requirements, subject to a four-year transition rule to limit the allowable amount of debt management plan income to 50% of revenues.
A new tax may be imposed on donor-advisor funds. An excess benefits transaction tax may be imposed on grants, loans, compensation or other similar payments from a donor-advised fund to a person that, with respect to such fund, is a donor, donor adviser, or a related person, and from a supporting organization to a substantial contributor or a related person.
Charitable organizations with unrelated income must make returns available. Starting in 2006, if a 501(c)(3) organization has gross income from an unrelated trade or business of $1,000 or more, it must make its annual organization business income tax return available for public inspection.