Charitable donations: new Pension law affects charitable donors and donees.
STRICTER REQUIREMENTS FOR MONEY DONATIONS
Old and Existing Law: A donor claiming a charitable donation deduction must maintain reliable written records regarding the donation--regardless of the donation's value or amount.
For money donations, the donor generally must maintain one of the following:
1. A cancelled check;
2. A receipt (or other written communication) from the donee showing the donee's name, the donation's date and amount; or
3. Other reliable written records showing the information in "2" immediately above.
In addition, for donations of $250 or more, no deduction is allowed unless substantiated by a contemporaneous written acknowledgment by the donee--which must include the amount of money donated; whether the donee provided any goods or services in consideration for the donation; and a good faith estimate of their value.
Also, if a charitable organization (except a governmental unit) receives a quid pro quo donation exceeding $75, the organization must provide a written statement informing the donor that the donation is deductible only to the extent it exceeds the value of goods or services provided by the organization and a good faith estimate of their value.
A quid pro quo donation is a payment made partly as a donation and partly as consideration for goods or services--except a payment to an organization, organized exclusively for religious purposes, for only an intangible religious benefit that generally is not sold in a commercial transaction outside the donative context.
New Law: For money donations, regardless of amount, the record keeping requirements are satisfied only if the donor maintains as a record of the donation a bank record or a written communication from the donee showing the donee's name, the donation's date and amount.
These requirements cannot be satisfied by other written records. The Joint Committee on Taxation's Technical Explanation states, "It is noted that currently, taxpayers are required to have a contemporaneous record of contributions of money, but that many taxpayers may not be aware of the requirement and do not keep a log of such contributions. The provision is intended to provide greater certainty, both to taxpayers and to the Secretary, in determining what may be deducted as a charitable contribution."
Comment: Money donations should be made by check. Credit card statements also would appear to satisfy this new requirement.
Effective Date: Donations made in tax years beginning after Aug. 17, 2006.
DEDUCTIONS CURTAILED FOR DONATIONS OF CLOTHING AND HOUSEHOLD ITEMS
Old Law: No special deduction limitations applied for contributions of clothing and household items.
New Law: No deduction is allowed for a charitable donation of clothing or household items unless they are in good used condition or better.
The Treasury is authorized to deny, by regulation, a deduction for any donation of clothing or a household item that has minimal monetary value--such as used socks and used undergarments.
The Joint Committee on Taxation's Technical Explanation states that "It is noted that the President's Advisory Panel on Federal Tax Reform and the staff of the Joint Committee on Taxation both have concluded that the fair market value-based deduction for contributions of clothing and household items present difficult tax administration issues, as determining the correct value of an item is a fact-intensive, and thus also a resource-intensive matter.
"As recently reported by the IRS, the amount claimed as deductions in tax year 2003 for clothing and household items was more than $9 billion. It is expected that the Secretary, in consultation with affected charities, will exercise assiduously the authority to disallow a deduction for some items of low value, consistent with the goals of improving tax administration and ensure that donated clothing and households items are of meaningful use to charitable organizations." (Footnotes omitted.)
However, a deduction may be allowed for a charitable donation of a single item of clothing or a household item, not in good used condition or better, if the amount claimed for the item exceeds $500 and the taxpayer's return includes a qualified appraisal of that item.
Household items include:
* linens; and
* other similar items
But household items do not include:
* Paintings, antiques and other art objects;
* Jewelry and gems; and
These new rules apply to individuals, partnerships and corporations. In the case of a partnership or S corporation, the rules apply at the entity level--except that the deduction is denied at the partner or shareholder level.
Effective Date: Donations made after Aug. 17, 2006.
TAX BENEFIT RECAPTURE FOR DONATED PROPERTY NOT USED FOR AN EXEMPT PURPOSE
Existing Law: The amount of the deduction for charitable donations of capital gain property generally equals the fair market value (FMV) of the donated property on the date of the donation. Capital gain property means any capital asset or property used in the taxpayer's business, the sale of which at its FMV, at the time of donation, would have resulted in gain that would have been long-term capital gain.
For certain property donations, the charitable deduction is reduced from the property's FMV by the amount of any gain, generally resulting in a deduction equal to the taxpayer's basis. This rule applies to donations of:
1. Ordinary income property, generally;
2. Tangible personal property that is used by the donee in a manner unrelated to the donee's exempt (or governmental) purpose; and
3. Property to or for the use of a private foundation [other than a foundation defined in IRC Sec. 170(b)(1)E)].
New Law: The new law generally recovers the tax benefit for charitable donations of tangible personal property for which an FMV deduction is claimed and which is not used for exempt purposes. This new rule applies to appreciated tangible personal property that is identified by the donee, for example on IRS Form 8283, as for a use related to the purpose or function constituting the donee's basis for tax exemption and for which a deduction exceeding $5,000 is claimed ("applicable property").
If the donee disposes of applicable property within three years of its donation, the donor is subject to an adjustment of the tax benefit. If the disposition occurs in the donor's tax year in which the donation is made, the donor's deduction generally is basis, not FMV.
If the disposition occurs in a subsequent year, the donor must include as ordinary income for the tax year in which the disposition occurs an amount equal to the excess (if any) of:
* The amount of the deduction previously claimed for that property; over
* The donor's basis in the property when it was donated.
However, there is no tax benefit adjustment if the donee certifies to the IRS, by written statement signed under penalties of perjury by an officer of the donee.
This statement must either:
1. Certify that the donee's use of the property was related to the purpose or function constituting the basis for the donee's exemption, describe how the property was used and how that use furthered such purpose or function; or
2. State the donee's use of the property at the time of the donation and certify that such use became impossible or infeasible to implement.
The donee must furnish a copy of this certification to the donor (for example, as part of IRS Form 8282--a copy of which is supplied to the donor).
A $10,000 penalty applies to a person who identifies applicable property as having a use related to a purpose or function constituting the basis for the donee's exemption knowing that it is not intended for such use.
Effective Dates: Contributions made and returns filed after Sept. 1, 2006; but for the penalty, for identifications made after Aug. 17, 2006.
BASIS ADJUSTMENT TO STOCK OF S CORPORATION DONATING PROPERTY
Old Law: Under the old law, if an S corp donated money or other property to a charity, each shareholder takes into account the shareholder's pro rata share of that donation in determining the shareholder's own income tax liability. The shareholder also must reduce the shareholder's basis in the S corp stock by the amount of the donation flowing through to the shareholder.
New Law: The amount of a shareholder's basis reduction in the shareholder's S corp stock, due to the S corp charitable donation, will be equal to the shareholder's pro rata share of the donated property's adjusted basis.
Example: Assume an S corp with one individual shareholder makes a charitable donation of stock with a $200 basis and a $500 FMV. The shareholder will be treated as making a $500 charitable donation (or a lesser amount if the special reduction rules of Sec. 170(e) apply) and will reduce the basis of the S corp stock by $200 (assuming the basis of that stock, before this reduction, is at least $200).
Effective Date: Donations made in tax years beginning after 2005 and tax years beginning before 2008.
ADDITIONAL REQUIREMENTS FOR FORM 990 FILERS
New requirements for certain exempt organizations that file the Form 990 series have been enacted under the PPA.
These new requirements affect Form 990, Return of Organization Exempt From Income Tax; Form 990-EZ, Short Form-Return of Organization Exempt From Income Tax; and Form 990-PF, Return of Private Foundation, for 2005 returns filed after Aug. 17, 2006.
They include an attachment to the form listing interest, annuities, royalties, or rents received from each controlled entity; loans made to a controlled entity; and any transfer of funds between the controlling organization and the controlled entity.
In addition, the IRS reminds filers that the requirement for exempt organizations to make their returns and exemption application public applies to all annual returns filed under Sec. 6011 after Aug. 17, 2006 that bear on the organization's unrelated business taxable income.
Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at (619) 469-6999 or firstname.lastname@example.org.
By Stuart R. Josephs, CPA
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|Author:||Josephs, Stuart R.|
|Date:||Oct 1, 2006|
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