Editor: Conrad Teitell, LL.B., LL.M.
Sydney Prerau, Editor 1962-1967
INCREASED CHARITABLE TAX INCENTIVES
|Katrina Emergency Tax Relief Act of 2005|
Overview. Some of KETRA’s (H.R. 3768) enhanced benefits are available for gifts to most public charities and not all gifts need be Katrina-relief related. That includes the unlimited ceiling on cash gifts made by December 31, 2005 (the deadline for most, but not all, enhanced tax benefits). These deductions are only available to itemizers.
The Sky (100% of AGI) Is the Limit for Cash Gifts from August 28 through December 31, 2005. The usual 50% of adjusted gross income ceiling on deductibility is waived. Cash gifts made to public charities in the 8/28 – 12/31/05 period, at the donor’s election, are deductible up to 100% of adjusted gross income whether or not the gift is related to Katrina relief. The long-standing rules (50% ceiling with five-year carryover) for gifts made before and after the 8/28 – 12/31/05 period continue to apply. Cash gifts by individuals, partnerships and S Corporations qualify for 100% deductibility. For partnerships and S Corporations, the election is made individually by each partner or shareholder.
Some exceptions. The enhanced 100% charitable deduction for cash gifts isn’t available for gifts to donor advised funds, but is available for gifts to unrestricted, field-of-interest and designated funds. Gifts to supporting organizations don’t qualify; nor do cash gifts to private foundations other than to private operating foundations.
An aside: portent of legislation to be reported out of the Senate Finance committee. The committee’s staff has been critical of donor advised funds and supporting organizations and the committee is considering legislation that would impose distribution requirements and otherwise tighten the rules for those entities. KETRA’s carving out donor advised funds and supporting organizations from favored donee status isn’t an accidental slip of the legislative pen. Deductions for gifts to private foundations —other than operating foundations—have since 1969 been less generous than for gifts to public charities. However, donor advised funds are run by public charities, and supporting organizations are public charities. For KETRA’s cash contribution provision, there are now two classes of public charities.
Assuring that a cash gift is deductible this year. If a check is sent by U.S. mail, the date of mailing is considered the date of delivery. (The delivered-when-mailed rule only applies to U.S. Postal Service, not to private couriers.) Thus the donor gets a deduction on this year’s tax return for a check mailed on the last day of December, even though the charity doesn’t receive it until the beginning of January.
Contributions charged on a credit card are deemed to be cash gifts, deductible in the year the charge is made.
Interesting questions. Suppose a donor contributes cash to his nonoperating private foundation (on a calendar year basis) during the 8/28 – 12/31/05 period and he elects to treat the foundation as a passthrough (conduit) foundation. The cash contribution, made during the 8/28 – 12/31/05 period, and 100% of other contributions to the foundation during 2005 are transferred to a public charity by December 31, 2005.
Question 1. Will the cash gifts to the public charity qualify for 100% deductibility or will the gift run afoul of Sec. 301(d)(2) of H.R. 3768?
Exception. Such term [qualified contribution for 100% deductibility] shall not include a contribution if the contribution is for establishment of a new, or maintenance in an existing, segregated fund or account with respect to which the donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to distributions or investments by reason of the donor’s status as a donor.
Question 2. Assuming Sec. 301(d)(2) of H.R. 3768 doesn’t apply, suppose the passthrough foundation makes the distribution to the public charity by March 15, 2006 (the 15th day of the 3rd month after the close of the foundation’s tax year). Under the usual passthrough rules, a donor can claim his deduction as a gift to a public charity on his 2005 income tax return. But will cash gifts made to the foundation during the 8/28 – 12/31/05 period be deemed paid to the public charity during that period?
My opinion. These are questions to ask, but envelopes not to push. If this is contemplated, get guidance from IRS.
Cash Gifts by C Corporations During the 8/28 – 12/31/05 Period.
The 10% of taxable income deductibility ceiling, at a corporation’s election, is waived and cash gifts are deductible up to 100%. The usual deductibility ceiling of 10% of taxable income (with a five-year carryover) continues to apply for gifts made before and after the 8/28 – 12/31/05 period. To qualify for the unlimited ceiling, cash gifts by C Corporations (unlike cash gifts by individuals, partnerships and S Corporations) must be for Katrina relief.
Volunteers Unreimbursed Expenses. Long-standing rules allow volunteers to deduct unreimbursed expenses incurred incidental to their volunteer work. Fares spent going from home to the charity’s office (or other places where services are rendered) phone calls, postage stamps, stationery and similar out-of-pocket costs are deductible as charitable donations.
Normally, a volunteer may deduct 14¢ per mile when using a vehicle to do volunteer work. However, if the volunteer uses the vehicle for Katrina relief-related activities, she may deduct 70% of the current standard business mileage rate. This liberalized rule applies starting August 25, 2005 (that’s the date in the statute—as opposed to August 28 for most other provisions) through December 31, 2006 (as opposed to 12/31/05 for most other provisions). So the volunteer can deduct 28¢ per mile for the period 8/25 – 8/31/05 (70% x 40.5¢ standard business mileage rate) and 34¢ per mile for the period 9/1 – 12/31/05 (70% x 48.5¢ standard business mileage rate). The business mileage rate for 2006 has not yet been set. Whether the 14¢ per mile, 28¢ per mile, 34¢ per mile (or 70% of any different business mileage rate for 2006) is used, also deductible are unreimbursed parking and toll costs.
Another way. A volunteer can deduct actual expenses for gas and oil—tolls and parking too.
Why a lower mileage rate for volunteers? The standard mileage rate for charitable purposes is lower than the standard business rate because the charitable rate covers only the out-of-pocket operating expenses for gasoline and oil directly related to the use of the vehicle in performing the donated services. The charitable rate doesn’t include costs that are not deductible as a charitable contribution such as general repair or maintenance expenses, depreciation, insurance, and registration fees. Those costs are, however, included in computing the business standard mileage rate. The low 14¢ statutory rate for volunteers was set by statute last century and hasn’t been raised to reflect increased costs for gasoline and oil. Unlike the business rate that can be adjusted by IRS, the volunteer rate has to be changed by Congress.
Substantiation. According to the legislative history, a taxpayer must— in addition to the present law substantiation requirements for use of the statutory mileage rate—substantiate that expenses are incurred in providing relief related to Hurricane Katrina. The lower 14¢ rate will apply if a taxpayer fails to meet that requirement.
Present law and continuing substantiation requirements. Substantiation whether using a cents-per-mile rate or the actual costs of gasoline and oil, requires that the taxpayer keep reliable written records of expenses incurred. For example, where a taxpayer uses the charitable mileage rate to determine a deduction, the IRS has stated that the taxpayer generally must maintain records of miles driven, time, place (or use), and purpose of the mileage. If the charitable mileage rate isn’t used to determine the deduction, the taxpayer generally must maintain reliable written records of actual expenses incurred.
Volunteer Drivers Who are Reimbursed for Mileage Expenses. Reimbursements by public charities and private foundations to a volunteer for the costs of using a passenger automobile in providing donated services to charity solely providing relief related to Hurricane Katrina are excludable from the volunteer’s gross income up to an amount that doesn’t exceed the business standard mileage rate prescribed for business use, as periodically adjusted. (See above item on volunteers’ deductions for current business rates.) The record-keeping requirements applicable to deductible business expenses must be satisfied. Note that a volunteer can’t claim a deduction or credit for any amounts excluded under this provision. This rule applies to the use of a passenger automobile for the period 8/25/05 -- 12/31/06. (Reader, this isn’t a typo. Most of the new rules apply to the 8/28 – 12/31/05 period. But for this one, it is 8/25/05 – 12/31/06.)
Gifts by Food Suppliers. Generally, these gifts are deductible at cost basis only. Over the years, however, C Corporations have been allowed a deduction for food gifts for the lower of (1) the donated property’s basis plus half of the appreciation (basis plus one-half of the fair market value in excess of basis) or (2) twice the property’s basis. That rule is now available for food gifts by sole proprietors, partnerships and S Corporations. The food gifts needn’t be Katrina related but must be made in the 8/28 – 12/31/05 period.
Requirements. To be eligible for the enhanced deduction, the contributed property must be the taxpayer’s inventory and be contributed to a public charity or a private operating foundation. And the donee must (1) use the property consistent with its 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) give the taxpayer a written statement that the donee’s use of the property will be consistent with those requirements. For contributed food subject to the Federal Food, Drug, and Cosmetic Act, the food must satisfy the applicable requirements of that Act on the date of transfer and for 180 days prior to the transfer.
The donor must make a corresponding adjustment to the cost of goods sold by decreasing the cost of goods sold by the lesser of the fair market value of the property or the donor’s basis in the inventory (Reg. §1.170A-4(c)(3)). Accordingly, if the allowable charitable deduction for inventory is the fair market value of the inventory, the donor reduces its cost of goods sold by that value, with the result that the difference between the fair market value and the donor’s basis may still be recovered by the donor other than as a charitable contribution.
Ceilings. The ceiling on a C Corporation’s deduction is 10% of taxable income—with a five-year carryover. For taxpayers other than C Corporations (sole proprietors, partnerships and S Corporations), the total deduction for donations of food inventory in the taxable year generally may not exceed 10% of the taxpayer’s net income for that taxable year for all sole proprietorships, S Corporations, or partner-ships (or other entity that is not a C Corporation) from which contributions of apparently wholesome food are made. For example, if a taxpayer is a sole proprietor, a shareholder in an S Corporation, and a partner in a partnership, and each business makes charitable contributions of food inventory, the taxpayer’s deduction for donations of food inventory is limited to 10% of the taxpayer’s net income from the sole proprietorship and the taxpayer’s interests in the S Corporation and partnership. However, if only the sole proprietorship and the S Corporation made charitable contributions of food inventory, the taxpayer’s deduction would be limited to 10% of the net income from the trade or business of the sole proprietorship and the taxpayer’s interest in the S Corporation, but not the taxpayer’s interest in the partnership.
The food doesn’t have to be prepared by Martha Stewart, but it must be wholesome. The enhanced deduction is available only for food that qualifies as "apparently wholesome food"—that’s food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
Book Inventory Gifts. The long-standing enhanced deduction al-lowed to C Corporations for book inventory gifts for the lower of (1) the basis of the donated books plus one-half of the appreciation (basis plus one-half of the fair market value in excess of basis) or (2) twice the property’s basis is extended to sole proprietors, partnerships and S Corporations. However, the books must be given to a "public school which is an educational organization described in [IRC §170(b)(1)(A) (ii)] and which provides elementary education or secondary education (kindergarten through grade 12)." The enhanced deduction is allow-able for contributions made in the 8/28 – 12/31/05 period and needn’t be Katrina related.
Requirements. To be eligible for the enhanced deduction, the contributed property must be inventory contributed to an educational organization described in IRC §170(b)(1)(A)(ii) and the donee must: (1) use the property consistent with its exempt purpose solely for the benefit of the ill, the needy, or minors, (2) not transfer the property in exchange for money, other property, or services, and (3) give the taxpayer a written statement that the donee’s use of the property will be consistent with those requirements.
A donor making a charitable contribution of inventory must make a corresponding adjustment to the cost of goods sold by decreasing that cost by the lesser of the fair market value of the property or the donor’s basis in the inventory (Reg. §1.170A-4A(c)(3)). Accordingly, if the allowable charitable deduction for inventory is the fair market value of the inventory, the donor reduces its cost of goods sold by that value, with the result that the difference between the fair market value and the donor’s basis may still be recovered by the donor other than as a charitable contribution.
Still additional requirements. The donee must be an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on. The enhanced deduction is not allowed unless the donee organization certifies in writing that the contributed books are suitable, in terms of currency, content, and quantity, for use in the donee’s educational programs and that the donee will use the books in those educational programs.
Additional Exemptions for Housing Hurricane Katrina Displaced Individuals. A personal exemption of $500 is allowable for each of up to four Hurricane Katrina displaced individuals housed by the taxpayer. The exemption may be claimed in 2005 and 2006 for any Hurricane Katrina displaced individual but may not be claimed in both years for the same individual.
A Hurricane Katrina displaced individual—definition. A person (1) whose principal place of abode on August 28, 2005 was in the Hurricane Katrina disaster area, (2) who is displaced from that abode, and (3) who is provided housing free of charge in the taxpayer’s principal residence for a period of 60 consecutive days which ends in the taxable year in which the exemption is claimed. Additionally, for a person whose principal place of abode on August 28, 2005 was located outside the core disaster area, to qualify as a displaced individual the person’s abode must have been damaged by Hurricane Katrina or the person must have been evacuated from the abode by reason of Hurricane Katrina. A Hurricane Katrina displaced individual may not be the spouse or any dependent of the taxpayer.
The "Hurricane Katrina Disaster Area": the area with respect to which a major disaster was declared by the President before September 14, 2005 by reason of Hurricane Katrina. The states for which that disaster was declared are Alabama, Florida, Louisiana, and Mississippi. "Core disaster area": that portion of the Hurricane Katrina disaster area determined by the President to warrant individual or individual and public assistance under KETRA.
Additional requirements. To claim the additional exemption, the tax-payer must provide the taxpayer identification number of the displaced individual. The exemption is not allowed if the taxpayer receives any rent or other amount from any source in connection with the providing of housing for a displaced individual.
Affect on other rules. The additional exemption isn’t subject to the income-based phaseouts applicable to personal exemptions, and is allowed as a deduction in computing alternative minimum taxable income.
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