In last month’s article, I told you about a provision that was enacted as part of the so-called “Extenders” legislation (Protecting Americans from Tax Hikes Act of 2015). That provision—early termination of some charitable remainder trusts—had never expired. Why? It hadn’t been previously enacted.
Now, I’ll turn to the charitable provisions that expired in 2014 and are extended permanently (retroactive to 2015).
Direct Tax-Free Charitable IRA Transfers
An individual age 70½ or older can make direct charitable gifts from an individual retirement account, including required minimum distributions, of up to $100,000 each year to public charities (other than donor advised funds (DAFs) and supporting organizations) and not report the IRA distributions as taxable income on his federal income tax return. Most private foundations are ineligible donees, but private-operating and pass-through (conduit) foundations are. A charitable deduction isn’t allowable for IRA distribution gifts. However, not paying tax on otherwise taxable income is the equivalent of a charitable deduction. The law wasn’t expanded to include DAFs as qualified donees.
Effective: Jan. 1, 2015 with no expiration date.
Reminder: IRA transfers at death continue to qualify for the unlimited estate tax charitable deduction and can have favorable income in respect of a decedent treatment.
IRAs at a donor’s death can also be used to fund charitable life-income plans for survivors.
S Corporations Making Contributions
When an S corporation contributes money or property to a charity, each shareholder takes into account the shareholder’s pro rata share of the contribution in determining his own income tax liability. But the S corporation shareholder had to reduce the basis in his S corporation stock by the amount of the contribution that flowed through to him.
The amount of a shareholder’s basis reduction in his S corporation stock— because of the S corporation’s charitable gift—now equals the shareholder’s pro rata share of the basis of the contributed property.1
Example. An S corporation with one individual shareholder makes a charitable gift of stock with a $200 basis and a $500 fair market value (FMV). The shareholder is treated as having made a $500 charitable contribution (or a lesser amount if the “ordinary income” rules of Internal Revenue Code Section 170(e) apply) and reduces the basis of his S corporation stock by $200. Under prior law, the shareholder’s basis in his stock would have been reduced by $500 (the amount of the charitable gift).
Effective. Jan. 1, 2015 with no expiration date.
Food Inventory Contributions—Expanded
Generally, the deduction for inventory contributions is limited to a donor’s basis (typically, cost) in the inventory or FMV, whichever is lower.
Exception. The special rules for gifts of food inventory expired in 2014 and are reinstated and made permanent beginning in 2015 as described below. The rules are further liberalized for these gifts starting in 2016. The new rules are detailed below.
C corporations can claim an enhanced deduction for certain inventory contributions for the lesser of: (1) basis plus one-half of the item’s appreciation (that is, basis plus one-half of FMV in excess of basis), or (2) two times basis.
A C corporation’s charitable contribution deductions for a year can’t exceed 10 percent of the corporation’s taxable income (with a five-year carryover).
Eligibility for the enhanced deduction. The contributed property must be inventory contributed to an IRC Section 501(c)(3) charity (with the exception of private nonoperating foundations), and the donee must: (1) use the property in a manner consistent with the donee’s exempt purpose solely for the care of the ill, the needy or minors, (2) not transfer the property in exchange for money, other property or services, and (3) provide the taxpayer with a written statement that the donee’s use of the property will be consistent with those requirements. For contributed property subject to the Federal Food, Drug and Cosmetic Act, the property must satisfy the applicable requirements of the Act on the date of transfer and for 180 days before the transfer.
Any taxpayer that’s engaged in a trade or business, whether or not a C corporation, is eligible to claim the enhanced deduction for donations of food inventory. For taxpayers other than C corporations, the total deduction for donations of food inventory in a taxable year generally may not exceed 10 percent of the taxpayer’s net income for the taxable year from all sole proprietorships, S corporations and partnerships (or other entity that isn’t a C corporation) from which contributions of apparently wholesome food are made.
The 10 percent limitation doesn’t affect the application of the generally applicable percentage limitations. For example, if 10 percent of a sole proprietor’s net income from the proprietor’s trade or business is greater than 50 percent of the proprietor’s adjusted gross income that otherwise limits the deduction, the available deduction for the taxable year (with respect to contributions to public charities) is 50 percent of the proprietor’s adjusted gross income (AGI). Consistent with present law, these contributions may be carried forward if they exceed the 50 percent limitation. Contributions of food inventory by a taxpayer that isn’t a C corporation that exceed the 10 percent limitation but don’t exceed the 50 percent limitation may not be carried forward.
Starting in 2016, the enhanced deduction for food inventory contributions is further enhanced by: (1) increasing the charitable percentage limitation for food inventory contributions and clarifying the carryover and coordination rules for those contributions; (2) including a presumption concerning the tax basis of food inventory donated by certain businesses; and (3) including presumptions that may be used when valuing donated food inventory.
First, the 10 percent limitation (described earlier) applicable to taxpayers other than C corporations is increased to 15 percent. For C corporations, these contributions are made subject to a limitation of 15 percent of taxable income. The general 10 percent limitation for a C corporation doesn’t apply to those contributions, but the 10 percent limitation applicable to other contributions is reduced by the amount of those contributions. Qualifying food inventory contributions in excess of the 15 percent limitations may be carried forward and treated as qualifying food inventory contributions in each of the five succeeding taxable years in order of time.
Second, if the taxpayer doesn’t account for inventory under IRC Section 471 and isn’t required to capitalize indirect costs under IRC Section 263A, the taxpayer may elect, solely for computing the enhanced deduction for food inventory, to treat the basis of any apparently wholesome food as being equal to 25 percent of the FMV of that food.
Third, for any contribution of apparently wholesome food that can’t or won’t be sold solely by reason of internal standards of the taxpayer, lack of market or similar circumstances or by reason of being produced by the taxpayer exclusively for the purposes of transferring the food to an organization described in IRC Section 501(c)(3), the FMV of the contribution shall be determined: (1) without regard to the internal standards, the lack of market or similar circumstances or the exclusive purpose, and (2) by taking into account the price at which the same or substantially the same food items (as to both type and quality) are sold by the taxpayer at the time of the contributions (or, if not so sold at that time, in the recent past).
Effective: Generally the modifications to increase the corporate percentage limit and to provide for presumptions relating to basis and valuation are effective for taxable years beginning in 2016.
Qualified Conservation Contributions—Expanded
Qualified conservation contributions aren’t subject to the rules that generally bar deductions for gifts of partial interests in property.
A qualified conservation contribution is a gift of a qualified real property interest to a qualified organization exclusively for conservation purposes.
Qualified real property interest is: (1) the entire interest of the donor other than a qualified mineral interest; (2) a remainder interest; or (3) a restriction, granted in perpetuity, on the use that may be made of the real property.
Qualified organizations are public charities, governmental units and certain supporting organizations (an organization organized and operated exclusively for the benefit of, to perform the functions of, or carry out the purposes of a charity).
Conservation purposes include: (1) the preservation of land areas for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish, wildlife, plants or similar ecosystem; (3) the preservation of open space (including farmland and forest land), where that preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly delineated federal, state, or local governmental conservation policy; and (4) the preservation of an historically important land area or a certified historic structure.
Ceilings on deductibility. Before 2006, qualified conservation contributions of capital gain property were subject to the same percentage of AGI ceilings and carryover rules that apply to other charitable gifts of capital gain property.
Increased 50 percent of AGI ceiling. The AGI ceiling rules on deductibility for individuals don’t apply to qualified conservation contributions.
Instead, individuals may deduct the FMV of any qualified conservation contribution to a charity described in IRC Section 170(b)(1)(A) to the extent of the excess of 50 percent of AGI over the amount of all other allowable charitable contributions. Conservation gifts aren’t taken into account in determining the amount of other allowable charitable contributions.
Additional increased benefit—15-year carryover. Individuals are allowed to carry over any qualified conservation contributions that exceed the 50 percent of AGI limit for up to 15 years. Normally, the carryover period is five years.
Farmers and ranchers—even more increased benefits. For an individual who is a qualified farmer or rancher for the taxable year in which the contribution is made, a deduction for a qualified conservation contribution is allowable for up to 100 percent (that’s not a typo) of the excess of the taxpayer’s AGI over the amount of all other allowable charitable deductions.
Corporate farmers and ranchers. For a corporation (other than a publicly traded corporation) that’s a qualified farmer or rancher for the taxable year in which the contribution is made, any qualified conservation contribution is allowable up to 100 percent (again, not a typo) of the excess of the corporation’s taxable income (as computed under IRC Section 170(b)(2)) over the amount of all other allowable charitable contributions. A corporation’s ceiling on deductibility is normally 10 percent of its taxable income. For corporate farmers and ranchers, any excess may be carried forward for up to 15 years as a contribution subject to the 100 percent rule.
Requirement that land be available for agriculture or livestock production. As an additional condition of eligibility for the 100 percent rule, for any contribution of property in agriculture or livestock production or that’s available for that production, by a qualified farmer or rancher, the qualified real property interest must include a restriction that the property remain generally available for that production.
Meeting the production test. There isn’t a requirement for any specific use in agriculture or farming, or necessarily that the property be used for those purposes; merely that the property remain available for those purposes.
How are you going to keep them down on the farm—or ranch? A qualified farmer or rancher is a taxpayer whose gross income from the trade or business of farming (under IRC Section 2032A(e)(5)) is greater than 50 percent of the taxpayer’s gross income for the taxable year.
Oh the farmer and the cowman should be (and frequently are) friends—comment. Why these super-special benefits for farmers and ranchers? When first enacted, Max Baucus (D-Montana) and Charles Grassley D-Iowa) were chairman and ranking member, respectively, of the Senate Finance Committee.
Alaska Native Corporations—new. Starting in 2016, special rules for qualified conservation contributions include conservation contributions made by “Native Corporations,” as that term is defined in section 3(m) of the Alaska Native Claims Settlement Act (Alaska Act).
For a conservation contribution that’s made by a Native Corporation and is a contribution of property that was land conveyed under the Alaska Act: A deduction for contributions is allowed to the extent that the aggregate amount of the contributions don’t exceed the excess of 100 percent of the taxpayer’s taxable income over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years as a contribution subject to the 100 percent limitation. The provision shouldn’t be construed to modify the existing property rights validly conveyed to Native Corporations under the Alaska Act.
Endnote
1. See Rev. Rul. 96-11 for a rule reaching a similar result for charitable contributions made by partnerships.
© Conrad Teitell 2016. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.