The passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH) brought with it opportunities for long-term tax planning that benefit tax-exempt organizations. The PATH Act makes permanent several popular tax provisions, including measures related to:
- Qualified conservation contributions,
- Food donations,
- Distributions from IRA accounts,
- Payments from controlled entities to their not-for-profit parent organizations, and
- S corporation charitable contributions
These provisions offer incentives for taxpayers to donate to charitable causes through deductions and other favorable changes to their tax liability.
Donations for Conservation Efforts
A qualified conservation contribution is a contribution of qualified real property to a qualified organization exclusively for conservation purposes. Taxpayers who make conservation contributions can claim a deduction based on the fair market value of the land and the landowner’s adjusted gross income (AGI) in the year of the donation. Remaining amounts of the contribution can be carried over for five years.
Prior to 2006, the AGI threshold was 30 percent and in 2006, the threshold increased to 50 percent of the AGI with a 15-year carryover. A larger threshold, 100 percent of AGI with a 15-year carryover, was permitted for qualifying farmer and rancher conservation easements. The PATH Act made these permanent, and in 2016, it will allow qualifying Alaska Native Corporations to also make conservation easements at the 100 percent AGI level with a 15-year carryover.
In its explanations for the 2016 revenue proposals, the Department of the Treasury asked for the provision to be reworked. Several elements make it vulnerable to misuse. Court cases over the last decade have highlighted donors who have taken large deductions for overvalued easements and for easements that allow donors to retain significant rights and that do not further important conservation purposes.
To address potential problems, the Department of the Treasury has proposed that the deduction for golf course and historical easements be reduced or eliminated. The creation of a new conservation credit is being considered as an alternative to the current deduction. The conservation credit would give qualified conservation organizations, which are expert in the conservation priorities and values of their geographic areas of operation, a central role in the distribution of the tax benefit.
The PATH Act did not make any modifications to the requirements for the deduction, but not-for-profits should monitor court cases and other regulatory action to see whether further changes in the deduction’s requirements could be coming.
Food Inventory Donation
The PATH Act permanently extends the enhanced deduction for charitable contributions of food inventory for non-corporate business taxpayers. For donations made after 2015, the charitable percentage limitation for food inventory is increased from 10 percent to 15 percent and the amount over can be carried forward for five years.
In previous iterations of the provision, businesses had to account for the market demand of the product when valuing their deduction. The PATH Act does away with this measure, which potentially allows businesses to receive larger incentives for their donations. At the same time, the rule may mean that nonprofits that receive the donation may be getting lower quality or unusable items. Organizations should be aware of this and consider whether they need to clarify their standards for what types of food they will accept.
The PATH Act permanently allows qualifying individuals (age 70 ½ or older) to make a nontaxable distribution up to $100,000 from their Individual Retirement Account (IRA) directly to a public charity. Organizations can now use the permanent status of this provision to encourage donors to contribute as part of their long-term tax strategy.
Many in the not-for-profit sector had hoped for a broader tax-free IRA distribution option when the provision was taken up in 2015. Some advocates sought a revised provision that would remove the annual cap. Others advocated for a measure that would allow tax-free IRA distributions to be contributed to donor-advised funds, supporting organizations and private foundations, which are currently not allowed.
Modified Tax Treatment of Payments to Controlling Exempt Organizations
In general, not-for-profits must be careful with the payments they receive from controlled entities. Rent, royalty, annuities and interest income from entities that are more than 50 percent controlled by the tax-exempt entity can be considered unrelated business income and subject to tax if the payments made reduce the net unrelated income of the controlled entity.
The PATH Act permanently extends a provision that allows not-for-profits with controlled entities a little more breathing room. The provision states that for contracts entered into or renewed after August 17, 2006, rent, royalty, annuities and interest income received from a controlled entity only become unrelated business income when the amount exceeds what would have been negotiated between two unrelated entities. Nonprofits should carefully review their contracts with controlled entities to ascertain that they meet this “arm’s length” standard.
Other provisions under the PATH Act may bring benefits to your not-for-profit organization as well. Shareholders of S corporations received permanent incentives to contribute property to charitable organizations by continuing to allow them to reduce their stock basis by their pro rata share of the adjusted property contributed by the S corporation to a charitable cause.
Teachers and other primary and secondary school educators received a permanent extension of the $250 deduction for qualifying educational expenses. In 2016, the deduction is expanded to include professional development expenses.
The PATH Act allows taxpayers to consider using charitable institutions as part of their multiyear tax strategies in new ways. Although the changes come with advantages to the nonprofit community, they may also bring additional regulations or scrutiny in the years to come.
Some limitations to the legislation still exist that the not-for-profit community should consider before moving forward. Some of the provisions had been flagged by the Department of Treasury as being vulnerable to abuse, and these concerns have not been addressed in the legislation. Not-for-profits should consider these limitations and the effect they may have on their organization as they reach out to their donors and stakeholders.
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