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Bailout Brings Return of Charitable Incentives

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The Tax Extenders and Alternative Minimum Tax Relief Act of 2008, signed into law by President Bush on October 3 as part of the bailout plan, contains a handful of charitable incentives that are newsworthy for individuals, businesses and nonprofit organizations.  All of these measures are temporary, with one expiring as soon as the end of this year.

  • Limited IRA Charitable Rollover

             In certain circumstances, a taxpayer may again exclude from gross income up to $100,000 of otherwise taxable distributions from his or her traditional or Roth IRA each year, so long as they are “qualified charitable distributions.”  These distributions must be made directly from the IRA trustee to one or more qualified public charities.  At the time of each distribution, the taxpayer must have reached age 70½.  And the distributions must otherwise qualify for a full charitable contribution deduction.  The sum of each year’s qualified charitable distributions can go toward satisfying the taxpayer’s minimum distribution requirements.  That sum need not be taken into account, however, in calculating whether the taxpayer has reached any of the percentage limitations on deductibility.

Note that contributions to non-operating private foundations, donor-advised funds and supporting organizations do not qualify, nor do distributions from employer-sponsored retirement plans such as SIMPLE IRAs and SEPs.  The exclusion only applies to contributions made during 2008 and 2009.

  • Basis Adjustment to Stock of S-Corporation Contributing Property 

             The Act preserves the benefit of providing a charitable contribution deduction for contributions of appreciated property by an S-corporation.  The required basis reduction under prior law diminished the tax benefit from making such a contribution.  Now, similar to the treatment of partnership and LLC interests, the amount of a shareholder’s basis reduction in the stock of an S-corporation will again be equal to the shareholder’s pro rata share of the adjusted basis of such property.  This provision applies to contributions made during taxable years beginning in 2008 and 2009.

  • Tax Treatment of Certain Payments to Controlling Organizations Modified

              Under the Act, payments of certain passive income (including interest, rent, annuities, and royalties) made by an entity that is more than 50 percent controlled by an exempt organization parent are again not subject to unrelated business income tax provided that the payments are determined to be at arm’s length, are reflective of fair market value, and are made pursuant to a binding written contract in effect on August 17, 2006, or under a renewal of such contract with substantially similar terms.  The amount of a payment that is determined to exceed fair market value is subject to unrelated business income tax and an additional 20 percent penalty if that payment reduces the unrelated business taxable income of the controlled subsidiary.  A tax-exempt organization that receives such payments from or engages in other financial transfers (including a loan) with a controlled entity must report those transactions on its annual information return.  This provision is effective for payments received or accrued in 2008 and 2009.

  • Enhanced Charitable Deduction for Contributions of Inventory and Computers, and Temporary Suspension of Contribution Limitation for Farmers

             The Act extends the temporary incentives dealing with food inventory and book inventory contained in the Pension Protection Act of 2006 to contributions made throughout 2008 and 2009.  This means that C-corporations, S-corporations, partnerships and sole proprietors can deduct charitable donations of certain ‘apparently wholesome’ food inventory.  Similarly, a charitable deduction is available to C-corporations for suitable educational books donated to public schools.  The deduction for both types of inventory is equal to the lesser of two times basis or the basis plus one-half of the fair market value in excess of basis.  For donations of food inventory, however, a 10 percent-of-taxable-income ceiling applies to businesses other than C-corporations, unless those businesses are eligible farmers or ranchers.  The Act raises the farmers’ and ranchers’ ceiling to 100 percent, much like qualified conservation contributions, so long as their donations of food inventory are made between October 3, 2008, and December 31, 2008.  Finally, the Act continues the longstanding pattern of extending the enhanced deduction for contributions of computer technology or equipment, including software, made by C-corporations to certain schools and public libraries in 2008 and 2009.

This summary was prepared by the members of Nutter Charitable Advisors.  For more information on the charitable provisions contained in the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 or on charitable giving or non-profit organizations in general, please contact your attorney at Nutter at 617-439-2000.

Circular 230 Disclosure:  To ensure compliance with IRS Circular 230, we inform you that any federal tax advice included in this communication is not intended or written to be used, and it cannot be used, for the purpose of (i) avoiding the imposition of federal tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising. 

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