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Katrina relief: legislation will impact charities.

The Katrina Emergency Tax Relief Act of 2005, which President Bush signed into law this past September 23, contains provisions that are likely to affect your organization for the balance of this year. At the time this article was written, the legislation had not been extended to cover Hurricane Rita.

The Act contains a number of provisions that directly affect "victims" of Hurricane Katrina. Previously, if a debt was forgiven, that money would have to be treated as income by the receiver. That has been waived for hurricane victims who either lived in the disaster area or lived elsewhere and suffered a loss from Hurricane Katrina.

Another provision allows early withdrawals from IRAs or qualified plans of up to $100,000 without penalty for residents of the disaster area. The withdrawal will be subject to income tax over a three-year period. If property was destroyed or otherwise involuntarily converted to cash due to the disaster, there will be a five-year (rather than two-year) replacement period to avoid tax on any gain. Personal casualty losses will be deductible without regard to the 10 percent of adjusted gross income limitation that generally applies.

Finally, residents of the disaster area can borrow up to $100,000 rather than $50,000 from an IRA or qualified plan and do not have to pay interest until 2007.

There are also provisions giving employers tax credits for hiring or retaining employees in the disaster area.

There are a number of provisions that change the rules for charitable contributions. You have to be familiar with them so that you can help donors take advantage of the liberalized rules and provide proper answers to your donors' questions.

Elimination of percentage limitations

The amount that individuals can deduct for charitable contributions in any one year is limited by the Internal Revenue Code. The deduction for cash donations to public charities cannot exceed 50 percent of the donor's adjusted gross income. Property donations, including marketable securities, are limited to 30 percent of adjusted gross income. If donors contribute more than these limits in any year, they can carry the excess forward for five years.

The Act provides that these limitations will not apply to "qualified contributions," and that they will be deductible up to 100 percent of adjusted gross income (less any other allowable contributions). A "qualified contribution" is one that meets two requirements:

* It is paid between August 28, 2005 and December 31,2005, in cash, to a public charity. The public charity cannot be a "supporting organization" as that term is defined in the Internal Revenue Code, and the payment cannot be made to a donor advised fund maintained by the public charity.

* The donor must elect to have the payment treated as a qualified contribution.

The definition does not require qualified contributions to be used for relief of Hurricane Katrina victims. Therefore, any donation to any charity can qualify if it meets the requirements.

The rules for corporate contributions are essentially similar, except that qualified contributions must be used for "relief efforts related to Hurricane Katrina." Without this change, a corporation's deduction for charitable contributions is limited to 10 percent of its taxable income. The Act removes this limitation for qualified contributions made between August 28, 2005 and December 31,2005.

Use of vehicles for hurricane relief

Individuals who use their vehicles for business can deduct a standard mileage rate for such use. That rate was recently increased to 48.5 cents per mile due to the increase in gasoline prices. However, if individuals use their vehicles for charitable purposes, their deduction is calculated using a rate of 14 cents per mile. Therefore, if an individual drives 1,000 miles on behalf of a charity, he can claim a $140 charitable contribution deduction.

The Act temporarily increases the deduction rate to 70 percent of the business deduction rate for use of a vehicle for relief related to Hurricane Katrina. At the current rate, the deduction will be for 34 cents per mile (48.5 times 70 percent). This rule applies to mileage driven between August 28, 2005 and December 31, 2006.

Also, the Act provides that any reimbursement received by a volunteer from a charitable organization for use of a vehicle to provide relief relating to Hurricane Katrina can not be included in income. The miles driven are not eligible for a contribution deduction, however, so the effect is a transaction without tax effect. This provision applies to reimbursements at not more than the standard business mileage rate for vehicle usage between August 28, 2005 and December 31, 2006.

Donations of food and books

Prior to the Act, if a business donated inventory to your organization, it could only claim a deduction for the amount of their basis in the property. However, if your organization used the property to carry out your charitable purposes, the business could claim an additional deduction of 50 percent of the difference between cost and fair market value, limited to twice the basis. For example, a donation of property that cost $100 and was worth $200 would yield a deduction of $150 if you used it in your operations and $100 if you did not.

Over the years, Congress has provided some enhanced deductions to encourage certain gifts. Lawmakers made two subtle changes in the Act. Prior to the Act, donors of books had to give them to Section 501(c)(3) organizations to get a deduction. While public schools and other governmental entities were eligible recipients of deductible contributions, they did not come within the special allowance.

The Act remedies this by allowing a deduction for books given to public schools. This change is not limited to contributions motivated by Hurricane Katrina, but it does only apply to donations made between August 28 and December 31, 2005.

Also, only certain corporations were eligible for an enhanced deduction for food donations. The Act allows all corporations to claim the deduction, with certain limitations on donations by S Corporations. Also, the deduction only applies to "apparently wholesome food," as defined in other federal legislation. This change only applies through December 31, 2005, but the donations don't have to be related to Hurricane Katrina.

Additional exemption for housing

While it probably doesn't affect your organization directly, there is another change that the Act includes as a charitable giving incentive. Under the Act, if you provide housing to a "Hurricane Katrina displaced individual" for at least 60 days, you can claim a $500 deduction for federal income tax purposes. The targeted individuals are those whose principal residence was in the Hurricane Katrina disaster area on August 28, 2005.

To qualify, the individual either had to have lived in the core disaster area and been displaced, or lived outside the core area in a home that was damaged by Hurricane Katrina or who was evacuated due to the storm.

You have to provide the housing free of charge to qualify for this additional deduction. You can claim the deduction for up to four people in either 2005 or 2006 if you meet the qualifications. You have to provide the individual's taxpayer identification number in order to claim the deduction.

The above provisions are expected to be extended to Hurricane Rita victims. It is important for you to understand these provisions, as your donors might be looking for information. Of course, if you are involved in responding to this disaster, you might find these incentives helpful in raising funds or in dealing with your staff and volunteers.

Harvey Berger, CPA, is a partner and national director of not-for-profit tax services in Vienna, Va., for the accounting and management consulting firm Grant Thornton LLP. His email address is: hberger@gt.com. D. Greg Goller, CPA, is the partner-in-charge, Not-For-Profit Solutions Group in Grant Thornton LLP's Washington, D.C. office. His email is ggoller@gt.com
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Title Annotation:Taxing Issues
Author:Goller, D. Greg
Publication:The Non-profit Times
Date:Nov 1, 2005
Words:1307
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