In February, the House of Representatives passed several tax bills and the Senate Finance Committee approved several tax bills that, if ultimately enacted, would impact tax-exempt organizations. The House bills would reduce the excise tax on the net investment income of private foundations. They also would extend and make permanent the temporary provisions applicable to IRA charitable distributions, conservation easements and contributions of food inventory, as well as the basis rules for stockholders of S corporations making charitable contributions of property. The Senate Finance Committee proposals would modify the provisions applicable to the excess business holdings rules, agricultural research organizations and revocation of exemption for failure to file information returns.
The proposals passed out of the Senate Finance Committee on Feb. 11, 2015, and now head to the full Senate. The House bills, bundled together as the “America Gives More Act of 2015,” passed the House on Feb. 12, 2015, and now head to the Senate. President Obama has already indicated that he will veto the House proposals for failure to offset the costs of the proposals.
The America Gives More Act of 2015
The America Gives More Act of 2015 (the “Act”) would reduce the excise tax on the net investment income of private foundations. It also would make permanent the IRA charitable distribution provision, the increased percentage limits and extended carryforward periods for conservation easements, the enhanced deduction for charitable contributions of food inventory, and the basis reduction applicable to S corporation shareholders when an S corporation makes a charitable contribution of property.
Reducing the Excise Tax on Net Investment Income
Reform may be coming to the excise tax on the net investment income of private foundations. Proposals to simplify the tax appeared last year both in the America Gives More Act of 2014 (the predecessor to the Act) and in the tax reform plan put forth by Rep. Dave Camp, then-chairman of the House Ways and Means Committee. The Act repeats the previously proposed reforms by proposing a single rate of tax at 1 percent instead of the two-rate structure currently in place. For a summary of the current law and Act provisions, click here.
President Obama has indicated support for reform of this tax. Although the president has indicated that he will veto the Act (see his Statement of Administration Policy here), his revenue proposals for this year include a similar simplification of the excise tax. While the Act would reduce the excise tax to a single rate of 1 percent, President Obama has proposed reducing the excise tax to a single rate of 1.35 percent. For an explanation of the president’s proposal for reform of this tax, see page 267 of the General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (available here).
For a detailed review and discussion of the current rules concerning the excise tax on net investment income of private foundations, click here.
IRA Charitable Distributions
The Act makes permanent the provision allowing taxpayers to distribute money directly from an IRA to a charity without paying taxes on the distribution. Originally enacted in 2006 and already extended three times, this provision has received bipartisan support in the past. The provision permits taxpayers who are at least 70½ years old to make tax-free distributions from an IRA to qualified charitable organizations (generally not including supporting organizations, private foundations or donor-advised funds). For a summary of the current law and Act provisions, click here.
Conservation Easements
Under a recently expired provision of the Internal Revenue Code, a taxpayer could deduct the fair market value of certain contributions of capital gain property to the extent of 50 percent of the taxpayer’s contribution base. Taxpayers also were allowed to carry forward any contribution above the 50 percent limitation for up to 15 years. Certain ranchers and farmers were permitted to deduct contributions subject to a 100 percent limitation instead of the 50 percent limitation. The Act would reinstate and make permanent these provisions. For a summary of the current law and Act proposals, click here.
The Obama administration has also indicated an interest in extending these provisions, with additional modifications to the rules for conservation easements. The president’s proposals would (i) impose additional qualifications on organizations eligible to receive conservation easements, (ii) require easements to further a “clearly delineated” government conservation policy and yield significant public benefit, (iii) require the donor to provide a detailed description of the easement’s conservation purposes, and (iv) require additional reporting of easements and their fair market values. For additional information concerning the president’s proposal, see page 188 of the General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (available here).
Donations of Food Inventory
Generally, a taxpayer’s deduction for charitable contributions of inventory is limited to the lesser of either the taxpayer’s basis in the inventory, or the inventory’s fair market value. However, C corporations are able to claim an enhanced deduction for certain contributions of inventory. The enhanced deduction available to C corporations was temporarily made available to any taxpayer engaged in a trade or business, whether a C corporation or some other type of business entity, that made charitable contributions of food inventory. The Act reinstates and makes permanent this enhanced deduction for contributions of food inventory with some modifications. The deduction limitation on such contributions is increased from 10 percent to 15 percent. Under the Act, certain taxpayers would be able to elect to treat the basis of certain food inventory as being equal to 25 percent of the fair market value of such food. Finally, the Act clarifies how certain food items will be valued. For a summary of the current law and Act provisions, click here.
Basis Adjustments for S Corporation Shareholders
Under a recently expired provision of the Internal Revenue Code, a shareholder of an S corporation was permitted to reduce the amount of the shareholder’s basis in the S corporation stock by the shareholder’s pro rata share of the adjusted basis of property contributed to a charity by the S corporation. Under current law, a shareholder in those circumstances is required to reduce the amount of his or her basis by the fair market value of property contributed to a charity. The act would make permanent the ability of shareholders of S corporations to use the adjusted basis of contributed property, rather than the fair market value, when reducing basis in S corporation stock. For a summary of the current law and Act provisions, click here.
Senate Finance Committee Approves Charitable Extenders
The Senate Finance Committee approved three bills that would amend the excess business holdings rules, establish agricultural research organizations as per se public charities and require the IRS to provide advance notice before revoking an organization’s exemption for failure to file information returns.
Excess Business Holdings
One proposal would provide an exception to the excess business holding rules for business enterprises acquired by private foundations through a transfer upon a donor’s death. Private foundations must have exclusive ownership of such business enterprises. A foundation will have exclusive ownership of a business enterprise if (i) all ownership interests in the business enterprise are held by the foundation at all times during the taxable year and (ii) all of the foundation’s ownership interests were acquired under the terms of a will or trust upon the death of the donor. Additionally, the business enterprise must pay annually an amount equal to its net operating income to the private foundation, after making certain adjustments. Finally, the operations of the business enterprise must be independent from the private foundation. No substantial contributor (or family member) can serve in a position of leadership or as an employee of the business enterprise; there must be little overlap between the family of any substantial contributors, the board of the private foundation, and the directors or officers of the business enterprise; and there cannot be any loans owed by the business enterprise to any substantial contributors or their family members. This proposal would not apply to donor-advised funds, supporting organizations or nonexempt charitable trusts. For a summary of the current law and the proposal, click here.
Agricultural Research Organizations
A second proposal would allow certain agricultural research organizations to qualify as tax-exempt public charities, regardless of the organizations’ sources of financial support. Qualified organizations must be engaged in continuous and active agricultural research in conjunction with a land-grant college or university or a non-land-grant college of agriculture. Charitable contributions to such organizations would be deductible by up to 50 percent of a donor’s contribution base if the contributions are committed to be spent within five years. For a summary of the current law and the proposal, click here.
Advance Notice of Automatic Revocation
For tax-exempt organizations that fail to file Form 990-series returns for two consecutive years, the final proposal requires the IRS to issue a notice not later than 300 days after the date of the second failure to file. The notice must inform the organization of the consequences for failing to file a return and provide guidance for complying with the filing requirement. The proposal also provides that an organization whose exemption has been revoked may have its exemption reinstated if it demonstrates that it did not receive the required notice from the IRS and the organization files a return for the current year. For a summary of the current law and the proposal, click here.