The Protecting Americans from Tax Hikes Act of 2015 (PATH), signed into law December 18, 2015, contains some very favorable provisions for charities. Some of these provisions provide permanent extensions while others are new administrative procedures. This article focuses on the permanent extensions affecting charities.
Tax-free IRA Charitable Distributions (up to $100,000 per year)
The biggest win for charities in PATH is the provision that made the tax-free IRA distribution to charities permanent. This provision allows taxpayers to exclude up to $100,000 per year from their taxable income when a charitable contribution is made from a traditional or Roth IRA. To qualify:
- The distribution must be made directly by the IRA trustee to a public charity (not a supporting organization or donor advised fund);
- The IRA owner must be at least 70 ½ years old; and
- The entire distribution must be deductible under the normal charitable deduction rules.
The exclusion is allowed only to the extent the distribution would otherwise have been includible in gross income.
Enhanced Charitable Deduction for Food Inventory
PATH also makes the enhanced deductions for donations of food inventory permanent. It also increases the percentage limitations (from 10 percent of the donor’s taxable income to 15 percent) for such donations made in taxable years beginning after December 31, 2015. Any excess can be carried forward for five years. The increased deduction equals:
- The cost basis of the donated items; plus
- One-half of the ordinary income that would have been realized if the items were sold at their fair market value at the time of the donation.
This deduction cannot exceed twice the donor’s basis in the donated item(s). The new law also provides guidance on determining basis and fair market value in certain circumstances.
S Corporation Charitable Contribution Basis Adjustment
S corporations have historically been at a disadvantage when making charitable donations of appreciated property. When donations are made, shareholders must reduce their stock basis by the fair market value of the donated property. In 2006, the law was changed to allow the shareholder’s stock basis to only be reduced by his or her share of the S corporation’s adjusted basis in the contributed property. However, this provision expired in 2014. PATH brings this provision back and makes it permanent.
Enhanced Qualified Conservation Contributions
In general, gifts of appreciated capital assets such as real estate are limited to 30 percent of the donor’s adjusted gross income (AGI), while gifts of cash are limited to 50 percent. Any donations in excess of these percentages are allowed a five year carryover. The enhanced qualified conservation contribution rules allow donors of qualified conservation interests to deduct up to 50 percent of their AGI and carry forward any excess contribution for 15 years. PATH made this rule permanent.
Payments to a Controlling Organization
Under IRC Sec. 512(b)(13)(A), certain “specified payments” (interest, rents, royalties, and annuities) paid to a controlling tax-exempt organization are included in the controlling organization’s unrelated business income (UBI) to the extent the payment reduces the net unrelated income or increases any net unrelated loss of the controlled entity.
However, the Pension Protection Act of 2006 created an exception for “qualifying specified payments,” defined as payments made under a binding written contract in effect on August 17, 2006. Such “qualifying specified payments” will not be taxable if the payments are at or below fair market value. If the payment exceeds fair market value (determined by the payment amount in an arm’s length transaction between unrelated parties), the excess is UBI and subject to a 20 percent penalty.
While this article summarizes some of the permanent extender provisions, this is not a comprehensive list. Many of these provisions have specific requirements for qualification. Please consult your tax advisor for more information about how they may apply to your individual circumstances.
Contact us at 215.441.4600 if you have questions or would like to discuss how this topic may impact your business.
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