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New Tax Legislation Extends Incentives for Charitable Giving


2/2/16

Synopsis

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act. In this tax legislation, many provisions favorable to charitable giving and tax exempt organizations have been extended permanently, and, in certain situations, expanded. Below is an overview of the PATH Act’s tax provisions affecting the not-for-profit sector.

Issue

Incentives for Charitable Giving – Tax Provisions Made Permanent

  • The Act permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs). The exclusion may not exceed $100,000 per taxpayer in any tax year, and it applies to distributions made after December 31, 2014.  (PATH Act Section 112)
  • The Act permanently extends the enhanced deduction for charitable contributions of inventory of apparently wholesome food for non-corporate business taxpayers. The provision modifies the deduction beginning in 2016 by increasing the limitation on deductible contributions of food inventory from 10% to 15% of the taxpayer’s AGI (15% of taxable income in the case of a C corporation) per year. The Act also modifies the deduction to provide special rules for valuing food inventory. This provision applies to tax years beginning after December 31, 2014. (PATH Act Section 113)
  • The Act permanently extends the rule providing  that a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro rata share of the adjusted basis of property contributed by the S corporation for charitable purposes. This provision applies to tax years beginning after December 31, 2014. (PATH Act Section 115)
  • The Act permanently extends the charitable deduction for contributions of real property for conservation purposes. The Act also permanently extends the enhanced deduction for certain individual and corporate farmers and ranchers.  These provisions apply to years beginning after December 31, 2014. The provision modifies the deduction beginning in 2016 to permit Alaska Native Corporations to deduction donations of conservation easements up to 100% of taxable income. These provisions apply to years beginning after December 31, 2015. (PATH Act Section 111)
     

Contributions Not Subject to Federal Gift Tax

  • The Act treats transfers to organizations exempt from tax under section 501(c)(4), (c)(5), and (c)(6) of the tax code as exempt from the gift tax. The provision applies to transfers made after the date of enactment (December 18, 2015). (PATH Act Section 408)
     

Declaratory Judgments Available to All Tax-Exempt Organizations

  • The Act extends the ability of tax-exempt organizations to seek review in Federal court of any revocation of exempt status by the IRS. This provision applies to pleadings filed after the date of enactment (December 18, 2015). (PATH Act Section 406)
     

Mandatory Application Process for Recognition of §501(c)(4) Tax-Exempt Status

  • There is now a new mandatory application process for all organizations seeking tax-exemption under section 501(c)(4). Previously, organizations intending to operate under 501(c)(4) were not obligated to file a tax-exempt status application with the IRS. The Act creates a streamlined recognition process.  The preexisting voluntary 501(c)(4) application process has been eliminated. The process requires 501(c)(4) organizations to file a simple one-page notice of registration with the IRS within 60 days of the organization’s formation. The IRS must provide a letter acknowledging the registration within 60 days of receiving the one-page notice. The organization can use the acknowledgement letter to demonstrate exempt status, typically with state and local tax authorities. (PATH Act Section 405)
  • It is important to note that §501(c)(4) in existence as of December 18, 2015, that have never filed a Form 1024 or a Form 990 must file a one-page notice of registration with the IRS within 180 days of December 18, 2015. (PATH Act Section 114) 
     

Certain Payments to Controlling Exempt Organizations

  • The Act permanently extends the modification of the favorable tax treatment of certain payments by a controlled entity to an exempt organization.  Pursuant to §512(b)(3), certain payments by a controlled subsidiary to a tax-exempt parent, such as rent, royalties, annuities, or interest, produce unrelated taxable income to the parent. The Act makes permanent the arm’s-length transaction exception; if such payments meet a fair market value standard, there will not be any unrelated business taxable income to the parent.
     

What Does CohnReznick Think?
The PATH Act has many important provisions that affect not-for-profit organizations as well as charitable giving. The permanent nature of the above mentioned extender is crucial and can help organizations and individuals plan ahead. Very important provisions of the Act will change the way §501(c)(4) organizations do business. However, it will also provide more clarity for the not-for-profit sector.

Contact

For more information, please contact Magdalena Czerniawski, Senior Manager, at magdalena.czerniawski@cohnreznick.com or 646-254-7419 or Thomas Lanning, Partner, at thomas.lanning@cohnreznick.com or 646-834-4108.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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