The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed in December 2015, made several incentives affecting not-for-profit (NFP) organizations permanent rather than merely extending them for another year. These now permanent incentives will continue providing resources that charitable organizations need to carry out their work.
The “enhanced” deduction for food inventory has been reinstated and the charitable percentage limitation cap on contributions of food inventory has been raised. Instead of limiting the deduction to the taxpayer’s basis, i.e., cost, the enhanced deduction is equal to the basis plus half of the inventory’s appreciation. The deduction may not exceed twice the basis of the food inventory. The PATH Act allows the taxpayer to treat the basis as equal to 25 percent of the fair market value of the food. In addition, the contribution limitation for donations of food inventory has increased to 15 percent from 10 percent of taxable income from the business generating the food inventory deduction. Additional rules clarify the charitable deduction carryover rules as well as determination of fair market value.
The special rule for qualified conservation contributions now is permanent.Individual land owners donating conservation easements are allowed a charitable deduction up to 50 percent of adjusted gross income (up from 30 percent). The amount not allowed as a deduction in the current year may be carried forward up to 15 years (up from five years). Qualified farmers and ranchers are allowed a charitable deduction up to 100 percent of their adjusted gross income with a 15-year carryforward. Corporations also receive similar enhanced contribution limits as individuals.
The qualified charitable distribution provision makes the exclusion from gross income for qualified charitable distributions from an individual retriement account (IRA) permanent. Qualified charitable distributions from an IRA are contributions to charitable NFP organizations made directly from traditional or Roth IRAs of individuals age 70½ or older. These distributions often would otherwise be subject to income tax.
The modification of tax treatment for certain payments to controlling exempt organizations provision allows a portion of the payments received under a binding written contract in effect on August 17, 2006, (or renewal of such a contract on substantially similar terms) to be excluded from the tax on unrelated business income (UBI). In general, interest, rents, royalties and annuities are excluded from the UBI of tax-exempt organizations. However, Internal Revenue Code (IRC) Section 512(b)(13) says if these payments reduce the net UBI of a 50 percent or greater controlled entity (whether taxable or tax-exempt), they must be included in the UBI of the parent exempt organization. For purposes of this paragraph, “control” is defined as any of the following:
- Ownership by vote or value of more than 50 percent of the stock of a stock subsidiary
- Ownership of more than 50 percent of the profits, capital or beneficial interest of a partnership
- Holding more than 50 percent of the voting power or value (directly or indirectly) of any subsidiary
Qualifying payments under a binding written agreement in effect on August 17, 2006, are taxed under the “arm’s-length” transfer pricing rules of IRC Section 482, with only the excess over fair market value subject to UBI tax.
The S corporation basis reduction for contributed property provision makes permanent the requirement for shareholders to reduce the basis in their S corp stock by the adjusted basis of any property contributed to a charitable organization by the S corp. In general, when an S corp contributes money or property to a charitable organization, the shareholders take their pro-rata share of the contribution into account when determining personal tax liability. Under prior law, the shareholder then reduced his or her basis in the stock of the S corp by their pro-rata share of the fair market value of the contributed property. The PATH Act makes permanent the rule that shareholder stock basis is reduced by the adjusted basis of the contributed property rather than the fair market value of the contributed property.
In addition to the permanent extensions listed above, the PATH Act also extended several provisions through 2019. One such extension to note for charitable organizations is the extension of the New Markets Tax Credit (NMTC). The annual limit for qualified equity investments each year through 2019 will be $3.5 billion. This annual limit is unchanged from 2010 to 2014. The PATH Act also extends the carryover period for any unused NMTC to 2024.
Finally, the PATH Act included a number of administrative matters affecting charitable organizations. One such administrative matter relates to Form 1098-T reporting. Prior to the PATH Act, educational institutions could choose between reporting amounts paid or reporting amounts billed for Form 1098-T reporting purposes. Educational institutions now are required to report qualified tuition and related expenses actually paid beginning with expenses paid after December 31, 2015. The PATH Act also clarifies application of laws and regulations with respect to church retirement plans in these areas:
- Controlled group rules
- Contribution and benefit limits
- Automatic enrollment in church defined contribution plans
- Transfers between 403(b) and 401(a) plans
- Investing in collective trusts
Another provision included in the PATH Act changes the current application process for organizations seeking exemption under IRC Section 501(c)(4). The PATH Act requires social welfare organizations to file a notice of registration with the IRS within 60 days of formation. The notice must include the organization’s name, address and taxpayer identification number as well as the date on which and state in which the organization was established and a statement of the organization’s purposes.
In addition, the IRS now is required to provide procedures under which a would-be tax-exempt organization may request an administrative appeal if it receives an adverse determination regarding its exempt status. Determinations made after May 19, 2014, are retroactively covered by this provision. Finally, the PATH Act clarifies that gifts to organizations exempt under IRC Section 501(c) are not subject to federal gift tax.
If you have any questions about how these changes could affect your organization, contact your BKD advisor.