Last week, on July 28, the House of Representatives approved a package of charitable giving incentives and reforms as part of pension reform legislation (H.R. 4). [Editor's note: President Bush signed H.R. 4, the Pension Protection Act of 2006, into law on August 17, 2006.] The charitable package is, in many respects, a watered-down version of provisions that were advanced by Senate Finance Committee chairman Chuck Grassley and the Panel on the Nonprofit Sector.
H.R. 4 now moves to the Senate for consideration, but passage is far from certain.
Charitable Giving Incentives. H.R. 4 contains seven separate giving incentives, all of which would run through the end of 2007. These incentives, according to a summary prepared by House Ways and Means Committee staff, include:
- Tax-Free Distributions from IRAs for Charitable Purposes. The IRA "rollover" provides an exclusion from gross income for certain distributions of up to $100,000 from a traditional individual retirement account (IRA) or a Roth IRA, which would otherwise be included in income. To qualify, the charitable distribution must be made to a tax-exempt organization to which deductible contributions can be made.
- Contributions of Food Inventory. For donations of food inventory, the provision extends an enhanced deduction for all trades and businesses.
- Certain Payments to Controlling Exempt Organizations. Under current law, rent, royalty, annuity, and interest income paid to a tax-exempt organization by a controlled taxable subsidiary is generally treated as unrelated business income, which is taxable to the tax-exempt parent organization. The provision provides that payments received or accrued by certain exempt parents from taxable controlled subsidiaries will not be treated as unrelated business taxable income.
- Qualified Conservation Contributions. The provision raises the charitable deduction limit from 30 percent of adjusted gross income to 50 percent of adjusted gross income for qualified conservation contributions, provided that such contribution does not prevent the use of the donated land for farming or ranching purposes. The charitable deduction limit is raised to 100 percent of adjusted gross income for eligible farmers and ranchers.
- Life Insurance Contracts. Under the provision, charitable organizations must report certain acquisitions of interests in certain insurance contracts for two years beginning on the date of enactment. The IRS is required to issue a report within 30 months after the date of enactment examining if acquisitions of applicable insurance contracts is consistent with the tax-exempt purposes of those charitable organizations that acquire such contracts.
- Clothing and Household Items. The provision specifies that no deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better. In addition, the IRS may deny a deduction for any item with minimal monetary value.
- Fines and Penalties Applicable to Charitable Organizations. The provision doubles the amount of excise taxes applicable to certain activities, such as taxes on self-dealing and excess benefit transactions, failure to distribute income, and excess business holdings, by charities, social welfare organizations, private foundations, and exempt organization managers.
- Notification Requirement for Exempt Organization. The provision requires certain exempt organizations to file an annual notice with the IRS containing basic contact and financial information. The requirement applies to organizations that currently do not have an annual filing requirement because their gross receipts are less than $25,000.
- Public Disclosure of Information Relating to Unrelated Business Income Tax Returns. The provision extends the present-law public disclosure requirements applicable to Form 990 to the unrelated business income tax returns of Section 501(c)(3) organizations.
- Donor-Advised Funds. The provision applies an excess benefits transaction tax on any grant, loan, compensation, or other similar payments from a donor-advised fund to a person that with respect to such fund is a donor, donor adviser, or a related person, and from a supporting organization to a substantial contributor or a related person. The provision imposes excess business holdings rules on donor-advised funds and Type III supporting organizations. Transition rules apply to the present holdings of donor-advised funds and supporting organizations. Supporting organizations that are functionally integrated with their charity would not be subject to any excess business holdings rules.
© 2006, 501(c) STRATEGIES
Perry Wasserman is managing director of 501(c) STRATEGIES, a Washington, D.C.-based government relations and communications firm representing GuideStar and other nonprofits on federal public policy issues. For more information on their work and services, please visit www.501cStrategies.com.