The Senate Finance Committee approved, by a 23 to 3 bipartisan vote, a two-year extension of four expired charitable laws; plus extension of over 50 others. Mindful that the legislative path takes unexpected twists and turns, the next step would be for the Senate to vote on the SFC’s approved provisions in a stand-alone bill. But it could hitch the extenders to another bill. We all learned in civics class that tax legislation originates in the House. Although the House earlier this year voted by a two-thirds majority to make the expired charitable laws permanent, the Senate made the House-passed bill disappear by stripping its title and provisions and using the House bill as the vehicle for the Senate’s trade bill.
The Senate’s summer recess (“State Work Period”) is scheduled for Aug. 10 to Sept. 7. The House Ways and Means Committee is expected to consider its own extenders bill when the House returns from its recess (“District Work”) on Sept. 8. The House will then vote on the W&M bill. Any differences in the House and Senate bills will go to a House-Senate Conference Committee to reconcile the discrepancies. The agreed-upon bill will be voted on by the House and Senate. Final passage and the President’s signature could happen in late September or October. But then again, another 11th hour extension wouldn’t be a surprise.
THE DETAILS OF THE SFC BILL
The Direct Charitable IRA Gift
An individual age 70½ or older can make direct charitable gifts from an IRA, including required minimum distributions, of up to $100,000 in 2015 (retroactive to Jan. 1) and 2016 to public charities (other than donor advised funds and supporting organizations) and not have to report the IRA distributions as taxable income on his federal income tax return. Most private foundations are ineligible donees, but private-operating and passthrough (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 extended charitable IRA provision doesn’t:
• Expand the law to authorize tax-free rollovers for life-income charitable gifts. The proposed All-American Charitable IRA Act (supported by the 501(c)(4) Charitable IRA Initiative) would authorize tax-free rollovers for CRUTs, CRATs and CGAs of up to $500,000 per year for donors 59½ and older.
• Expand the qualified charity donees to include donor advised funds, supporting organizations and most private foundations (operating and conduit foundations are already qualified donees).
S Corps Making Contributions
Former basis adjustment. When an S Corp 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 Corp shareholder had to reduce the basis in his S Corp stock by the amount of the contribution that flowed through to him.
Favorable basis adjustment for 2006 through 2014 and now through 2016. The amount of a shareholder’s basis reduction in his S Corp stock—because of the S Corp’s charitable gift—equals the shareholder’s pro rata share of the basis of the contributed property. [See Rev. Rul. 96-11 (1996-1 C.B. 140) for a rule reaching a similar result for charitable contributions made by partnerships.]
For example, an S Corp with one individual shareholder makes a charitable gift of stock with a $200 basis and a $500 fair market value. 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 Corp stock by $200.
The deduction for contributions of inventory generally is limited to the donor’s basis (typically, cost) in the inventory or fair market value, whichever is lower.
Exception. Qualifying C corporations can claim an enhanced deduction for the lesser of: (1) basis plus one-half of the item’s appreciation (for example, basis plus one-half of fair market value 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).
To be eligible for the enhanced deduction, 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, whether or not a C corporation, engaged in a trade or business was eligible to claim the enhanced deduction for donations of food inventory in 2012 through 2014. This expanded law will be extended for 2015 and 2016. 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 temporary suspension in 2012 through 2014 of a corporation’s 10 percent limit for qualified farmers and ranchers is extended for 2015 and 2016. For qualified farmers or ranchers, the percentage limitation is eliminated for any charitable contribution of food and the contribution is treated as if it were a qualified conservation easement.
Qualified Conservation Contributions
Qualified conservation contributions aren’t subject to the rules that generally bar deductions for gifts of partial interests in property.
Qualified conservation contribution. 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. 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 under 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 adjusted gross income ceilings and carryover rules applicable to other charitable gifts of capital gain property.
Increased 50 percent of adjusted gross income ceiling—rules through 2013 and now through 2016. The 30 percent adjusted gross income (AGI) ceiling on deductibility for individuals doesn’t apply to qualified conservation contributions.
Instead, individuals may deduct the fair market value 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 adjusted gross income 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 adjusted gross income over the amount of all other allowable charitable deductions.
Corporate farmers and ranchers. For a corporation (other than a publicly traded corporation) that is 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 is 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 such 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.
© Conrad Teitell 2015. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.