While most provisions of the Internal Revenue Code (“Code”) do not automatically expire, there are dozens that do. Included among the expiring provisions have been several intended to enhance charitable giving. Each has been hostage to the late-year legislative ritual of frequent short-term extensions, which has created significant uncertainty for donors, charities, and their advisors. Fortunately, in the latest round of tax legislation, known as the Protecting Americans from Tax Hikes Act (“PATH Act”), many of these favorable provisions have been extended permanently and, in some cases, expanded.
IRA Rollover and Conservation Easements. Perhaps the charitable provision addressed in the PATH Act which has received the most publicity is the Individual Retirement Account (IRA) charitable rollover. A taxpayer who has reached age 70½ is required to receive mandatory minimum distributions from his or her IRA. Under the charitable rollover, a taxpayer may designate up to $100,000 each year for direct distribution from his or her IRA to one or more public charities (other than supporting organizations and donor advised funds). These distributions do not generate an income tax charitable contribution deduction, but they are excluded from the donor’s gross income and do count toward satisfying his or her minimum distribution requirement. Also extended permanently was the income tax deduction for contributions of qualified conservation easements, including the enhanced deduction for certain corporate farmers and ranchers. The deduction was also expanded, beginning in 2016, to permit Alaska Native Corporations to deduct up to 100 percent of the corporation’s taxable income for donations of conservation easements.
Food. The rule that permits enhanced deductions for charitable contributions of wholesome food inventory for the care of the ill, the needy, or infants was made permanent under the PATH Act and, beginning in 2016, the limitation on the amount of such deduction in any one year will be raised from 10 to 15 percent of the taxpayer’s taxable income (if a taxable corporation) and to 15 percent of adjusted gross income for all other taxpayers.
Contributions by Sub-Chapter S Corporations. When an S corporation makes a gift to charity, the tax benefit is passed through to the shareholders in proportion to their respective ownership interests in the corporation. When that gift is in the form of property owned by the corporation, the shareholders are required to adjust their tax basis in the stock they hold in the corporation by an amount equal to their pro rata shares of the corporation’s basis in the contributed property. The PATH Act makes this rule permanent.
Agricultural Research. The range of organizations to which a deductible charitable contribution can be made has been expanded under the PATH Act to include organizations that conduct agricultural research. These organizations will be treated as public charities, per se, which will entitle donors to potentially higher tax deductions for their contributions.
Gift Tax. In addition to determining whether a charitable contribution may qualify for an income tax deduction, there have been questions raised about whether a transfer to other forms of tax-exempt entities raises exposure under the federal gift tax. The PATH Act clarifies prospectively that the gift tax does not apply to transfers made to organizations described in Code Sections 501(c)(4), (5) and (6), often described as social welfare or civic organizations, agricultural or labor organizations, and business leagues and trade associations, respectively.
Social Welfare and Civic Organizations. Much has been written, of late, about the special scrutiny paid to some Code Section 501(c)(4) organizations that may have been created primarily to promote a political agenda rather than a social or civic purpose. In an effort to clarify and streamline the process by which an organization seeks recognition that it meets the qualifications of Code Section 501(c)(4), the current voluntary procedure of filing a formal request for recognition of favorable tax status has been modified. Now, a new organization will be required to file a notice with the Internal Revenue Service (IRS) within 60 days of the organization’s formation. The filing will be subject to a “reasonable” user fee, the amount of which has not yet been determined. Within 60 days of receipt of such notice, the IRS will be required to provide the organization with an acknowledgment. Should it later be determined that an organization that has registered does not, in fact, qualify under Section 501(c)(4) and its status is revoked by the IRS, the organization will be permitted the opportunity to seek a declaratory judgment to reinstate its favorable status. In addition to, but not in lieu of, the new notice procedure, an organization still may file an exemption application with the IRS seeking formal recognition of Code Section 501(c)(4) classification. Such formal recognition will provide additional certainty regarding the organization’s tax status.