At a February 4 press briefing, the Treasury released the "General Explanations of the Administration's Fiscal Year 2009 Revenue Proposals," also known as the "Blue Book." With respect to charitable giving, the administration proposes to make permanent a number of previous incentives including: tax-free withdrawals from IRAs for charitable purposes, the enhanced charitable deduction for contributions of food, the enhanced deduction for corporate contributions of computer equipment for educational purposes, increased limits on contributions of partial interests in real property for conservation purposes, and the basis adjustment to the stock of S corporations that contribute appreciated property. A new proposal would replace the current two-tier 2%/1% excise tax applicable to the net investment income of private foundations with a single tax rate of one percent.

Provide Incentives for Charitable Giving

PERMANENTLY EXTEND TAX-FREE WITHDRAWALS FROM IRAS FOR
CHARITABLE CONTRIBUTIONS

Current Law

Eligible individuals may make deductible contributions to a traditional individual retirement arrangement (traditional IRA). Other individuals with taxable income may make nondeductible contributions to a traditional IRA. Earnings and pre-tax contributions in a traditional IRA are includible in income when withdrawn.  Withdrawals made before age 59½ are subject to an additional 10-percent excise tax, unless an exception applies.

Individuals with adjusted gross incomes (AGI) below certain levels may make nondeductible contributions to a Roth IRA.  Amounts withdrawn from a Roth IRA as a qualified distribution are not includible in income.  A qualified distribution is a distribution made (1) after 5 years and (2) after the holder has attained age 59½, died, or become disabled, or for first-time homebuyer  expenses of up to $10,000.  Distributions from a Roth IRA that are not qualified distributions are includible in income to the extent the distributions are attributable to earnings, and are also subject to an additional 10-percent excise tax, unless an exception applies.

Individual taxpayers who itemize their deductions may claim a deduction for contributions made to qualified charitable organizations.  Total deductible contributions may not exceed 50 percent of the taxpayer’s AGI, and lower deductibility limits apply in the case of contributions of appreciated property and contributions to certain private foundations.  Excess amounts may be  carried forward and deducted in future years.  In addition, the total of most categories of itemized deductions, including charitable contributions, is reduced by 1 percent of AGI in excess of a certain threshold ($159,950 for joint filers in 2008 up to a maximum reduction of 26 and 2/3 percent of total deductions).  Taxpayers who elect the standard deduction (“non-itemizers”) may not claim a deduction for charitable contributions. 

Individuals may exclude from gross income (and thus from AGI for all purposes under the Code) distributions made after age 70½ from a traditional or Roth IRA (but not a SIMPLE IRA or SEP IRA) directly to a qualified charitable organization.  The exclusion may not exceed $100,000 per taxpayer per taxable year and is available without regard to the percentage-of-AGI limits that apply to deductible contributions.  

The exclusion does not apply to distributions to certain private foundations, supporting organizations, or donor advised funds.  The exclusion applies only if a charitable contribution deduction for the entire distribution would otherwise be allowed under current law, determined without regard to the percentage-of-AGI limitation.  No charitable deduction is allowed with respect to any amount that is excludable from income under this provision. If an amount transferred from the IRA would otherwise be nontaxable, such as a qualified distribution from a Roth IRA or the return of nondeductible contributions from a traditional IRA, the normal charitable contribution deduction rules apply.  This exclusion is scheduled to expire on December 31, 2007.

Reasons for Change

Allowing taxpayers who are at the stage in their life when they are already required to take distributions from their IRAs to exclude from income direct transfers to qualified charities will stimulate additional charitable giving by simplifying the required tax calculations and eliminating the current-law tax disincentives.  Permanency will maintain this incentive.

Proposal

The exclusion from income of qualified distributions made after age 70½ from a traditional or Roth IRA directly to a qualified charitable organization would be made permanent.

Revenue Estimate

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PERMANENTLY EXTEND THE ENHANCED CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORY

Current Law

A taxpayer’s deduction for charitable contributions of inventory property generally is limited to the taxpayer’s basis (typically, cost) in the inventory. However, for certain contributions of inventory, C corporations may claim an enhanced deduction equal to the lesser of (1) the taxpayer’s basis in the contributed property, plus one-half of the gain that would have been realized had the property been sold or (2) two times basis.  To be eligible for the enhanced deduction, the inventory must be contributed to a charitable organization (other than a private nonoperating foundation), and the donee must (1) use the property consistent with the donee’s exempt purpose solely for the care of the ill, the needy, or infants, (2) not transfer the property in  exchange for money, other property, or services, and (3) provide the taxpayer a written statement that the donee’s use of the property will be consistent with these requirements.  To claim the enhanced deduction, the taxpayer must establish that the fair market value of the donated item  exceeds basis.

Through December 31, 2007, all businesses, and not just C corporations, are eligible for the enhanced deduction for donations of food inventory.  For all businesses, the enhanced deduction is available only for donations of “apparently wholesome food” (food intended for human consumption that meets all quality and labeling standards imposed by Federal, State, and local laws and regulations, even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions).  In the case of a taxpayer other than a C corporation, the total deduction for donated food inventory for any taxable year may not exceed 10 percent of the taxpayer’s net income from the related trade or business.  Eligibility for the enhanced deduction by businesses other than C corporations is scheduled to expire on December 31, 2007.

Reasons for Change

The enhanced deduction for contributions of food inventory increases donations of food by all types of businesses.  Permanent extension of this provision supports charities working to combat hunger. 

Proposal

The proposal would make permanent the expansion of the enhanced deduction for donations of food inventory to all types of businesses and the clarification of the definition of eligible food.

Revenue Estimate

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PERMANENTLY EXTEND THE ENHANCED DEDUCTION FOR CORPORATE CONTRIBUTIONS OF COMPUTER EQUIPMENT FOR EDUCATIONAL PURPOSES

Current Law

A taxpayer’s deduction for charitable contributions of inventory property generally is limited to the taxpayer’s basis (typically, cost) in the inventory property.  The Taxpayer Relief Act of 1997 provided an enhanced deduction for a three-year period for charitable contributions by C corporations of computer technology or equipment to elementary and secondary schools and charities formed for the purpose of supporting elementary and secondary education.  In 2000, this provision was extended for an additional three-year period and expanded to apply to charitable contributions of computer technology or equipment to post-secondary educational  institutions and public libraries.  It was extended again in 2004.  In 2006, this provision was extended for an additional two-year period.  In addition, the definition of property eligible for the enhanced deduction was expanded to include property assembled by the taxpayer. 

For contributions made in taxable years beginning before January 1, 2008, the amount of the deduction is equal to the lesser of (1) the taxpayer’s basis in the contributed property, plus one-half of the gain that would have been realized had the property been sold, or (2) two times basis.  To qualify for the enhanced deduction, the contribution must satisfy various requirements.  This provision does not apply to contributions made in taxable years beginning after December 31, 2007. 

Reasons for Change

This provision provides an incentive for C corporations to contribute computer equipment and software for the benefit of local communities and students at the elementary, secondary, and post-secondary school levels, by providing public libraries and educational institutions with needed technology resources.  Because the need for technology resources is ongoing, this provision should be made permanent.

Proposal

The enhanced deduction for C corporation donations of computer equipment would be made permanent.

Revenue Estimate

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PERMANENTLY EXTEND INCREASED LIMITS ON CONTRIBUTIONS OF
PARTIAL INTERESTS IN REAL PROPERTY FOR CONSERVATION PURPOSES

Current Law

In general, a deduction is permitted for charitable contributions, subject to certain limitations that  depend on the type of taxpayer, the property contributed, and the donee organization.  The amount of the deduction generally equals the fair market value of the contributed property on the  date of the contribution.

Corporations generally are allowed to deduct charitable contributions up to a limit of 10 percent of taxable income (computed without regard to net operating or capital loss carrybacks).  Individual taxpayers who itemize their deductions may claim a deduction for charitable contributions up to a percentage of the taxpayer’s adjusted gross income (AGI) (computed  without regard to any net operating loss carryback).  The percentage limit for individuals varies depending on the type of donee organization and the type of property contributed.  In general, the deduction for charitable contributions may not exceed 50 percent of AGI.  However, lower percentage limits apply to contributions of capital gain property and contributions to certain private foundations.  For example, the deduction for contributions of capital gain property to public charities, private operating foundations, and certain non-operating foundations generally may not exceed 30 percent of AGI.  In general, in the case of both individuals and corporations, charitable contributions in excess of the percentage limits may be carried forward for up to five years.

Gifts of partial interests in property generally are not deductible as charitable contributions.  However, to encourage donations for conservation purposes, the tax law provides an exception to the “partial interest” rule for qualified conservation contributions.  A qualified conservation contribution is a contribution of a qualified real property interest (such as a remainder interest or a restriction (granted in perpetuity) on the use that may be made of the real property) to a qualified organization exclusively for conservation purposes.  Qualified conservation contributions generally are subject to the same limitations and carryover rules as apply to other charitable contributions of capital gain property.

Through December 31, 2007, special percentage limits and carryover rules apply to contributions of partial interests in real property for conservation purposes.  For contributions made prior to January 1, 2008, an individual taxpayer may deduct the fair market value of any qualified conservation contributions up to a limit equal to the excess of (i) 50 percent of AGI over (ii) the amount of all other allowable charitable contributions (determined under the general rules described above, but not taking into account the qualified conservation contributions).  In the case of a qualified farmer or rancher, the limit is 100 percent of the excess of the individual taxpayer’s AGI (or 100 percent of the corporation’s taxable income) over the amount of all other allowable charitable contributions.  In addition, for both individuals and corporations, the number of years that qualified conservation contributions in excess of these limits may be carried forward is increased to 15 years from 5 years. 

Reasons for Change

Increasing the limits on the allowable deduction for qualified conservation contributions will stimulate charitable giving for conservation purposes by increasing the incentives to donors. Permanency will maintain the incentives.

Proposal

The increased limits on the deduction for qualified conservation contributions would be made permanent.

Revenue Estimate

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PERMANENTLY EXTEND THE BASIS ADJUSTMENT TO STOCK OF S CORPORATIONS CONTRIBUTING APPRECIATED PROPERTY

Current Law

If an S corporation contributes money or other property to a charity, each shareholder takes into account the shareholder’s pro rata share of the contribution in determining the shareholder’s income tax liability. Prior to the enactment of the Pension Protection Act of 2006 (PPA), a shareholder of an S corporation reduced the basis in the stock or indebtedness of the S corporation by the amount of the charitable contribution that flowed through to the shareholder. In many cases, a shareholder’s basis in S corporation stock reflects the basis of the contributed property, whereas the charitable contribution deduction reflects the fair market value of the contributed property. As a result, pre-PPA law deprived some S corporation shareholders of the full benefit of the charitable contribution deduction.

Reasons for Change

PPA modified the rules for adjusting the basis of S corporation stock to preserve the benefit of providing a charitable contribution deduction for contributions of appreciated property by an S corporation. S corporation shareholders are allowed to adjust their basis in the stock by their pro rata share of the adjusted basis (not fair market value) of the contributed property. The provision applies only to charitable contributions made by an S corporation in taxable years beginning before January 1, 2008.

Proposal

The proposal would permanently extend the rule allowing S corporation shareholders to adjust their stock basis for a charitable contribution deduction by their pro rata share of the adjusted basis of contributed property.

Revenue Estimate

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REFORM EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE FOUNDATIONS

Current Law

Private foundations that are exempt from Federal income tax generally are subject to a two- percent excise tax on their net investment income. The excise tax rate is reduced to one percent in any year in which the foundation’s distributions for charitable purposes exceed the average level of the foundation’s charitable distributions over the five preceding taxable years (with certain adjustments). Private foundations that are not exempt from Federal income tax, including certain charitable trusts, must pay an excise tax equal to the excess (if any) of the sum of the excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation. Under current law, private nonoperating foundations generally are required to make annual distributions for charitable purposes equal to at least five percent of the fair market value of the foundation’s noncharitable use assets (with certain adjustments). The amount that a foundation is required to distribute annually for charitable purposes is reduced by the amount of the excise tax paid by the foundation.

Reasons for Change

The current “two-tier” structure of the excise tax on private foundation net investment income may discourage foundations from significantly increasing their distributions for charitable purposes in any particular year. Under the current formula, any increase in the foundation’s percentage payout in a given year (by increasing the average percentage payout) makes it more difficult for the foundation to qualify for the reduced one percent excise tax rate in subsequent years. Eliminating the “two-tier” structure of this excise tax would ensure that private foundations do not suffer adverse excise tax consequences if they increase their grant-making in a particular year to respond to charitable needs. Such a change would also simplify tax planning and the calculation of the excise tax for private foundations. In addition, lowering the excise tax rate for all foundations would make additional funds available for charitable purposes.

Proposal

This proposal would replace the two rates of tax on private foundations that are exempt from Federal income tax with a single tax rate of one percent. The tax on private foundations not exempt from Federal income tax would be equal to the excess (if any) of the sum of the one- percent excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation. The special reduced excise tax rate available to tax-exempt private foundations that maintain their historic level of charitable distributions would be repealed. The proposal would be effective for taxable years beginning after December 31, 2008. ­

Revenue Estimate

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