On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. The PATH Act contains several provisions affecting tax exempt organizations.
Contribution Permanent Tax Extenders
The PATH Act permanently extends, for all taxable years beginning after December 31, 2014, a number of federal tax provisions intended to incentivize charitable giving, including:
- Tax-free distributions from Individual Retirement Accounts (IRAs) for Charitable Purposes: This provision allows individuals age 70 ½ or older the ability to take tax-free distributions from individual retirement plans (IRAs) when donated to a tax-exempt charity. The maximum amount that can be donated per year is $100,000 and the recipient charity may not be a supporting organization or a donor-advised fund. Absent this provision, the distribution would first be treated as taxable income to the individual and then treated as a charitable contribution deduction.
- Qualified Conservation Contributions: Individuals or corporations receive an increased charitable contribution deduction for contributions of real property interests for conservation purposes. The normal 30% of adjusted gross income limit for appreciated property gifts is increased to 50% and the carryforward limit is increased from five years to 15 years.
- Contribution of Food Inventory: Taxpayers other than corporations are allowed enhanced deductions for donations of food inventory. The deduction is the lesser of basis plus one-half of fair market value in excess of basis or two times basis.
- Adjustment of basis in S corporation stock: When a Subchapter S Corporation gives appreciated stock or land to charity, only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair-market value deduction is claimed by the shareholder.
Another Permanent Tax Extender
Payments by Controlled Subsidiaries to Parent Tax Exempt Organizations: In general, certain passive income (such as rents, interest and royalty payments) is excluded from taxable unrelated business income (UBI) by statute. However, IRC 512(b)(13) provides that such payments received by a tax exempt organization from entities that it controls (more than 50 percent ownership of stock or beneficial interest) are generally taxed as UBI. An exception to the UBI treatment (subjecting only the amount in excess of FMV to tax) was made for payments made pursuant to a binding written contract in effect on August 17, 2006 (or renewal of such contract under substantially similar terms). This exception had to be extended every year and now is made permanent for years beginning after December 31, 2014.
Mandatory Application Process for Recognition of 501(c)(4) Exempt Status: In the past, organizations intending to operate under 501(c)(4) were not required to file an exemption application with the IRS. Potential 501(c)(4) organizations could either self-certify their exemption or complete IRS Form 1024 in order to receive an IRS determination letter recognizing their exempt status.
Under the act, all 501(c)(4) organizations that are organized after December 18, 2015, must provide notice of formation and intent to operate as a 501(c)(4) organization no later than 60 days after formation. The notice must include name, address, taxpayer identification number, date on which (and the state under the laws of which) the organization was organized, and a statement of purpose of the organization. There will also be a user fee required with this notice. The IRS will then provide a letter acknowledging the registration within 60 days of receiving the one-page notice. This does not grant the organization a favorable determination. If the organization wants additional assurance of a favorable determination, they must still complete an exemption application on a newly created Form 1024.
501(c)(4) organizations already in existence as of December 18, 2015 that have never filed a Form 1024 or a Form 990 must file a one-page notice of registration with the IRS within 180 days of December 18, 2015. This means that all 501(c)(4) organizations must either have previously filed a Form 1024, Form 990 or the one-page notice of registration within the appropriate time frame. The IRS is expected to release the one-page notice of registration form early in 2016.
Declaratory Judgments Available to All Section 501(c) Organizations: The PATH Act permits an exempt organization to seek a declaratory judgment from a federal court, when related to an IRS exemption ruling under Internal Revenue Section 501(c). This provision provides greater recourse for organizations whose exempt status has been revoked, denied, or where a determination letter was failed to be issued by the IRS.
IRS Required to Issue Procedures for Administrative Appeals to the IRS Appeals Office: The PATH Act requires the IRS to create procedures under which an-exempt organization facing an adverse determination may request an administrative appeal to the IRS Office of Appeals. The provision applies to determinations made after May 19, 2014.
Federal Gift Tax on Gifts to Certain Exempt Organizations: Effective for gifts (contributions) made after December 18, 2015, Congress addresses the issue of whether contributions to 501(c)(4), (c)(5), and (c)(6) organizations are subject to federal gift tax. The IRS has not enforced the gift tax in this situation but has also not ruled that it is not applicable. This provision makes it clear that gifts to 501(c)(4), (5) or (6) organizations are exempt from the gift tax. Because of anticipated IRS administrative forbearance, gifts made on, or prior to, December 18, 2015 will not likely be subject to gift tax.
Charitable Contributions to Agricultural Research: Effective on or after December 18, 2015, a higher individual charitable contribution level will be allowed on charitable contributions (up to 50 percent) made to an agricultural (ag) research organization. A qualifying ag organization will be directly engaged in the continuous active conduct of ag research (as in university programs), and during the year the contribution is made, the ag organization agrees to use the funds for research purposes before January 1 of the fifth calendar year that begins after the date of the contribution.
Church Plan Clarifications: Effective on or after December 18, 2015, the IRS is prohibited from aggregating otherwise eligible organizations of a church plan to be treated as a single plan for non-discrimination purposes, thereby allowing for less restrictions on participants receiving disproportionate benefits under the plan and more flexibility for church plans to decide which other church plans they will associate. The provisions also allow church plans to offer auto-enroll accounts, similar to 401(k)s, relaxes maximum benefit accruals for grandfathered church defined-benefit plans and makes it easier for church plans to reorganize or invest in collective trust arrangements.