Nonprofit Accounting Basics

PATH Act Makes Permanent Several Popular Provisions which Promote Charitable Giving

Topics: 

On December 18, 2015 the President signed the PATH Act (Protecting Americans from Tax Hikes Act). While generally considered an extenders bill (multiple tax incentives were extended one year at a time), this Act makes permanent some of the provisions which promote charitable giving by individuals and businesses.

These include:

  • Charitable contributions of food inventory-- Several tax incentives apply here such as making permanent an enhanced deduction for contributions of food inventory by both corporate and non-corporate donors and, beginning in 2016, increasing the contribution limit to 15 percent of the taxpayers net income for the year, and providing a 5-year carryover for qualifying food contributions that exceed the 15 % limit. 
  • IRA Charitable Transfers –-The one that gets the most press is the tax-free treatment of charitable distributions from individual retirement plans by individuals age 70 ½ and older. An individual age 70 ½ must annually withdraw required minimum distributions (“RMD”) from their IRA. The amount is generally taxable to the recipient. This provision allows an IRA participant to meet their IRA RMD requirement through an “IRA Charitable Rollover” whereby IRA amounts (up to $100,000 annually) transferred directly to charity are not treated as taxable income. This in effect reduces the participant’s adjusted gross income (“AGI”), which is important because many tax deductions, credits, and some taxes (e.g., the 3.8% Obamacare net investment income tax) depend on the level of a taxpayer’s AGI. This provision was the most used and desired charitable donation extender, and the charitable sector is most pleased it is now a permanent part of the law.
  • Incentives for qualified conservation contributions-- Special rules have been made permanent for contributions of capital gain real property for conservation purposes. These rules include enhanced annual charitable deduction limits for contributions of real property for conservation purposes and a longer carry-forward period (15 years, rather than 5 years) for qualified conservation contributions in excess of the enhanced annual charitable deduction limits.
  • Modification of unrelated business income tax treatment of certain payments to a controlling exempt organization — the amount of certain rent or royalty payments made by a controlled exempt organization to a controlling exempt organization that need to be treated as unrelated business taxable income by the controlling exempt organization is limited by a special tax provisions now made permanent.
  • Basis adjustment to S Corp stock resulting from a charitable contribution of property –the Act makes permanent the rule that a shareholder’s basis in the stock of an S Corporation is reduced only by the shareholder’s pro rata share of the adjusted basis of property contributed by the S Corporation for charitable purposes. This alleviates the former concern of S corporation shareholders about getting a full fair market value deduction for donations of appreciated capital gain property.