Tag Archives: charitable contribution deductions

PATH Act Makes Permanent Several Popular Provisions which Promote Charitable Giving

Tax jpgOn December 18, 2015 the President signed the PATH Act (Protecting Americans from Tax Hikes Act). While generally considered an extenders bill (multiple tax incentives were extended one year at a time), this Act makes permanent some of the provisions which promote charitable giving by individuals and businesses.

These include:

  • Charitable contributions of food inventory –several tax incentives apply here such as making permanent an enhanced deduction for contributions of food inventory by both corporate and non-corporate donors and, beginning in 2016, increasing the contribution limit to 15 percent of the taxpayers net income for the year, and providing a 5-year carryover for qualifying food contributions that exceed the 15 % limit.
  • IRA Charitable Transfers –The one that gets the most press is the tax-free treatment of charitable distributions from individual retirement plans by individuals age 70 ½ and older. An individual age 70 ½ must annually withdraw required minimum distributions (“RMD”) from their IRA. The amount is generally taxable to the recipient. This provision allows an IRA participant to meet their IRA RMD requirement through an “IRA Charitable Rollover” whereby IRA amounts (up to $100,000 annually) transferred directly to charity are not treated as taxable income. This in effect reduces the participant’s adjusted gross income (“AGI”), which is important because many tax deductions, credits, and some taxes (e.g., the 3.8% Obamacare net investment income tax) depend on the level of a taxpayer’s AGI. This provision was the most used and desired charitable donation extender, and the charitable sector is most pleased it is now a permanent part of the law.
  • Incentives for qualified conservation contributions. Special rules have been made permanent for contributions of capital gain real property for conservation purposes. These rules include enhanced annual charitable deduction limits for contributions of real property for conservation purposes and a longer carry-forward period (15 years, rather than 5 years) for qualified conservation contributions in excess of the enhanced annual charitable deduction limits.
  • Modification of unrelated business income tax treatment of certain payments to a controlling exempt organization — the amount of certain rent or royalty payments made by a controlled exempt organization to a controlling exempt organization that need to be treated as unrelated business taxable income by the controlling exempt organization is limited by a special tax provisions now made permanent.
  • Basis adjustment to S Corp stock resulting from a charitable contribution of property –the Act makes permanent the rule that a shareholder’s basis in the stock of an S Corporation is reduced only by the shareholder’s pro rata share of the adjusted basis of property contributed by the S Corporation for charitable purposes. This alleviates the former concern of S corporation shareholders about getting a full fair market value deduction for donations of appreciated capital gain property.

Please contact our office if you have any questions about these provisions at 301-231-6200.

Fishing for Funding and the Charitable Deduction Debate

fishing for moneyAs the government works to solve the country’s budget problems, President Obama and Congress are considering caps or cuts to the charitable tax deduction. Recently Senator Max Baucus, Chairman of the Senate Finance Committee and Senator Orrin Hatch, Senior Rep. on the committee, initiated a process of crafting legislation to overhaul the tax code beginning with a “blank slate”. The overhaul, as the two Senators envision it, will strip the tax code of all deductions, exclusions, and credits – including charitable deductions.

The two Senators sent out a letter to the Senate asking them to submit by July 26 detailed proposals for what tax breaks should be included in a rewritten tax code. The letter also stated that only tax breaks that are proven to make the tax code fairer, help grow the economy, or effectively promote other important policy objectives will be considered for inclusion in the rewritten tax code.

Where do nonprofit entities stand on this issue? Will this leave nonprofits fishing for funding? It does not come as a surprise that many argue that the charitable deduction is essential for the nonprofit entities’ well-being and doing away with it will ultimately lead to a drop in donations. In a written piece for U.S. News, Brian Gallagher, President and CEO of United Way Worldwide and Father Larry Snyder, President of Catholic Charities USA argue that the caps and cuts are bad logic:

“The charitable deduction is different than other itemized deductions. It encourages giving, rewards a selfless act, and helps raise more for charities than would have otherwise been possible. Data suggests that for every dollar a donor gets in tax relief, the public typically receives $3 of benefit. No other tax provision generates that kind of positive public impact.”

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Online Donations OK By IRS

The IRS released an Information Letter on March 29, 2013 stating that there is no prohibition against a 501(c)(3) utilizing an internet fundraising platform to raise funds. Which is good because that’s been around for a few years.

They did include some good suggestions.

  • Be sure to consider any state laws and regulations that may apply.
  • Be sure to make it clear on the website the status as a 501(c)(3).
  • Providing something of value to donors may violate the rules against private benefit or inurement, so be sure to disclose the value and a statement that it is de minimus (unless it isn’t).
  • Be sure to disclose whether or not, and how much, of a donation is tax deductible for the donor.

Read the letter here.

Ways and Means Hearing on Charitable Contribution Tax Deduction

Just in time for Valentine’s Day, the House of Representatives Ways and Means Committee held a hearing featuring over 40 witnesses testifying in favor of protecting the charitable contribution tax deduction.

Large nonprofits were in attendance, including: Council on Foundations, Meals on Wheels, Jewish Federations of America, and the United Way, among others. Participants in the hearing were pushing the committee to not institute a cap on charitable deductions and discussed other topics including valuation of noncash donations and mileage reimbursement incentives for volunteers.

United Way Worldwide President & CEO Brian Gallagher testified, “Don’t be fooled into thinking that limiting the deduction will only impact wealthy taxpayers. If the deduction is reduced, expect donors to withhold the difference necesary to cover the tax from their donations.” Estimates of the impact of a 28% cap to United Way’s donations projected a reduction in donations of more than $100 million annually.

Read more about the seven hour hearing here.

Substantiation of Charitable Contributions

The documentation requirements taxpayers must maintain in order to take a charitable contribution deduction on their tax return have been in place for almost 20 years. They are worth repeating however, as two recent tax court cases have upheld the necessity of following these rules and denied contribution deductions to taxpayers who did not have the necessary documentation.

As a review a donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the recipient organization. Although it is a donors responsibility to obtain a written acknowledgement, charities should be very mindful of these rules because certainly donor relations are at stake if something goes wrong.  IRS publication 1771 outlines these requirements.

In a 2012 case, David and Veronda Durden were denied a tax deduction for contributions made to their church because the original acknowledgement letter received from the Church did not clearly stipulate that no goods or services were provided to the donors in exchange for their donation ( TC Memo 2012-140). To correct this problem, the Church issued a second acknowledgement letter with the required statement but it was rejected by the Court because it was not considered to be contemporaneous.

To be considered contemporaneous, the documentation must be obtained on or before the earlier of:

  • The date the taxpayer files the original return for the taxable year, or
  • The due date ( including extensions ) for filing the original return for the year.

There are rules outlining necessary steps if a non-cash donation of over $5000 is claimed for what is required to take a deduction for non-cash property (real estate, furniture, computer equipment, clothing etc.). The donor is required to file a Form 8283 with their standard return and it must include the signature of a “qualified appraiser” as to the value assigned to the donated property.

The tax court case of Joseph and Shirley Mohamed (TC memo 2012-152) also ruled against the taxpayers (who had taken a deduction of millions of dollars for donated real estate) because they did not properly comply with the rules regarding Form 8283  and did not obtain a qualified appraisal.  This case resulted in a really draconian result for the taxpayer who had clearly donated substantially valuable property to their presumably valid charitable remainder trust, yet were denied the deduction due to improper reporting of the gift as far as completing the requirements of IRS Form 8283.

In both of these cases, the Tax Court has sent a strong message that the substantiation rules DO MATTER and failure to follow them closely will result in the loss of a contribution deduction.

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