All Cash Donations Must Be Documented

Under the new law, a charitable donor will not be allowed a write-off for contributions of cash, checks, or other monetary gifts unless the donor

More Generous Rules for Qualified Conservation Contributions     For 2006 and 2007, the Pension Protection Act includes temporary liberalized deduction rules for "qualified conservation contributions" by individuals to traditional public charities  (Section 170(b)(1)(A) organizations). This basically means standard public charities. Here's a rundown of the new rules:     The maximum write-off for such contributions is increased from 30 to 50 percent of adjusted gross income. Qualified conservation contributions are not counted when calculating an individual’s allowable write-offs for other charitable contributions.  Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for up to 15 years (only a five-year carryover period is allowed under the normal rules). For a qualified farmer or rancher, the conservation contribution write-off for donated farm or ranch real property can be as much as 100 percent of the donor’s adjusted gross income. However, the donation must include a usage restriction stating that the property is required to remain available for agricultural or livestock production. (This restriction is not required for 2006 contributions that occurred before August 17, 2006.) For qualified conservation contributions by a non-publicly traded corporation that is a qualified farmer or rancher, the allowable deduction can shelter as much as 100 percent of taxable income. Qualified corporate contributions in excess of what can be written off in the donation year can be carried forward up to 15 years. Numerous Other Strict New Rules Here are some unfavorable new rules in the new law (this is not a complete list): Harsh restrictions on write-offs for donations of certain easements located in registered historic districts. Stricter rules for donations of fractional interests in tangible personal property. For annual periods beginning after 2006, small tax-exempt organizations that are not required to file annual Forms 990 with the IRS (generally organizations with annual gross receipts of less than $25,000) must file annual statements that provide basic contact information and financial data. Some charities must make copies of their annual Forms 990T filed with the IRS (unrelated business taxable income returns) available for public inspection. This rule applies to affected returns filed after the August 17, 2006, enactment date. For the period ending two years after the August 17, 2006, enactment date, temporary new reporting requirements apply to acquisitions by charities of interests in certain life insurance contracts. Credit counseling agencies will face stricter rules when attempting to qualify for tax-exempt status. Harsher rules for donations of taxidermy.

retains either a bank record that supports the donation (for example, a cancelled check) or a written communication from the recipient charity that meets specified requirements. This unfavorable new rule will kick in starting with tax years that begin after the new law’s date of enactment. This means calendar 2007 for most individual donors although it could be sooner for some donors with non-calendar tax years.

The existing rule that requires donors to obtain charity-provided substantiation for cash contributions of $250 or more remains in force. Cash donations under the $250 threshold will fall under the new rule imposed by the Pension Protection Act.

Key Point: Once the new rule takes effect, undocumented cash contributions, such as money placed on church collection plates and cash dropped into Salvation Army pots, won’t result in any write-offs for donors.

Stricter Rules For Donated Clothing And Other Items

Effective for donations after August 17, 2006, no deductions will be allowed for contributions of clothing and household items that are not in "good used condition or better."

Congress also gave the IRS authority to issue rules stating that deductions would be denied for items of "minimal monetary value, such as used socks..."

For purposes of this new rule, “household items” includes furniture, electronics, appliances and linens. A favorable exception allows write-offs for single items that are not in "good" condition or better if they are appraised at more than $500.

Donations Can Be Made Directly Out of IRAs

The new law permits an individual who is age 70 1/2 or older to arrange for distributions of otherwise taxable traditional and Roth IRA amounts paid directly to certain tax-exempt charities. Such distributions are free from federal income tax for the donor, but no deduction is allowed. However, the tax-free treatment equates to a 100 percent write-off. This favorable new rule for “qualified charitable distributions” is available for 2006 and 2007, but no more than $100,000 can be donated under the new rule in either of those years.

Under the pre-Pension Protection Act rules, a person who wanted to donate money from an IRA had to take a withdrawal from the account, include the taxable amount of the withdrawal in income, donate the cash to charity, and hope for the best in claiming an itemized charitable donation write-off. Unfortunately, tax-law limitations on itemized charitable deductions sometimes caused the allowable deduction to be less than the income triggered by the IRA withdrawal. The new law eliminates that problem, but only for 2006 and 2007. And unless Congress takes further action, the previous rules will come back into play after 2007.

“Qualified charitable distributions” mean payments by an IRA trustee directly to a qualified public charity (certain donor-advised funds are excluded). A special calculation must be made to figure the amount of a qualified charitable distribution when the donor owns one or more IRAs to which nondeductible contributions have been made. The new rule cannot be used for SEP accounts or SIMPLE IRAs. Remember: Qualified charitable contributions are free from federal income tax, but they don’t generate a write-off for the donor.

Key Point: The new rule is beneficial for older taxpayers who don’t itemize and for those who would be adversely affected by the limitations on itemized charitable donation write-offs.

Extension of Tax Break For Food Inventory Donations

As you may recall, the Katrina Emergency Tax Relief Act of 2005 temporarily allowed enhanced charitable deductions for non-C corporation businesses that donated food inventories. This write-off was for donations made between August 28, 2005 and December 31, 2005. The Pension Protection Act extends this break through December 31, 2007.

Under the normal tax rules, a food inventory donation by a non-C-corporation business is limited to the lesser of the inventory’s tax basis or fair market value. The enhanced deduction is bigger. It equals the lesser of the inventory’s tax basis, plus 50 percent of the appreciation in value, or 200 percent of the tax basis.

To be eligible for the enhanced deduction, the food generally must be donated to a Section 501(c)(3) tax-exempt organization. In addition, the organization must use the food consistent with its exempt purpose solely for the care of the ill, the needy, or infants. The organization must not transfer the food for money, other assets, or services. Finally, the organization must give the donor a written statement that these requirements will be met.

Key Point: For non-C corporation businesses, the total write-off for donations of food inventories under the enhanced deduction rule generally cannot exceed 10 percent of the net income for the year from all sole proprietorships, S corporations, or partnerships (or other non‑C corporation entities) from which the donations are made.

Tax Break Extension For Books Donated By C Corporations

The Katrina Emergency Tax Relief Act of 2005 also temporarily allowed enhanced charitable deductions for qualified book contributions by C corporations between August 28, 2005 and December 31, 2005. The Pension Protection Act extends this break through December 31, 2007. The enhanced deduction equals the lesser of:

• The tax basis of the books, plus 50 percent of the appreciation in value or
• 200 percent of the tax basis.

Qualified book donations must go to schools that provide elementary or secondary education, normally maintain a regular faculty and curriculum, and have a regularly enrolled student body. The enhanced deduction is only allowed if the recipient school provides the donor with a written statement certifying that the contributed books are suitable for use in the school’s educational programs and will be used for that purpose.

For 2006 and 2007, the Pension Protection Act provides a temporary new tax incentive to encourage S corporations to make charitable donations of appreciated assets. For such contributions, each shareholder’s tax basis in his or her S corporation stock is only reduced by the shareholder’s pro-rata percentage of the company’s tax basis in the donated assets.

Under the pre-Pension Protection Act rules, a shareholder’s basis reduction was equal to the passed-through deduction for the donation. When appreciated assets (fair market value in excess of tax basis) were given, the resulting write-off and shareholder stock basis reduction often exceeded the shareholder’s pro-rata percentage of the company’s basis in the donated assets. The temporary new rule is beneficial to taxpayers because it leaves shareholders with a higher basis in their S corporation stock (higher stock basis is almost always beneficial to shareholders).

(For information about other provisions in the Pension Protection Act, click here to read our previous article.)