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Focus on Not-For Profits: Tax Act Extends Charity-Related Provisions and UBTI Exception

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The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”) was signed by the President on December 17, 2010. Several provisions in the Act may impact not-for-profit organizations
January 3, 2011

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”) was signed by the President on December 17, 2010. Several provisions in the Act may impact not-for-profit organizations, including the following:

The provisions that allows direct transfers not to exceed $100,000 per year by IRA owners who have attained age 70 1/2 have been extended through 2011. 

The provisions that benefit donors of specific types of property (food inventory, book inventory and computer inventory), have been extended.

The provision that exempts from unrelated business taxable income certain rent, interest, and royalty payments from controlled (subsidiary) organizations has also been extended. 

There are also changes in payroll withholding tables that take effect for 2011.

IRA Transfers

The Act extends the temporary rule allowing direct transfer of Individual Retirement Account (IRA) funds to qualifying charities. The IRA owner must be age 70 1/2 or older.  The contribution must be made to a qualifying charity, which is generally defined as a tax-exempt organization to which the 50% of adjusted gross income limitation for individual deduction applies. So-called “donor advised funds” and “supporting organizations” are not qualifying charities. To permit taxpayers to take advantage of this provision for 2010, the law permits an election for distributions made in January 2011 to be treated as made on December 31, 2010 for purposes of the $100,000 limitation and for the IRA required minimum distribution for 2010.  Rules are to be issued to prescribe how the distributions made in January 2011 may be deemed to occur on December 31, 2010.

Observation

For many taxpayers with significant taxable income who itemize deductions, there may be little difference in tax liability between a direct transfer from the IRA to a charity versus withdrawing funds from the IRA on a taxable basis and making a deductible charitable contribution. This is because two common phase-out provisions will not apply to 2010, 2011 or 2012. First, personal exemptions are not subject to a phase-out based on adjusted gross income. Second, the overall limitation on itemized deductions is repealed for the three-year period. This overall limitation means that increasing a taxpayer’s adjusted gross income prior to 2010 generally resulted in a greater reduction of itemized deductions allowed. Since there are other tax calculations that may change due to an increase in adjusted gross income from an IRA distribution, donors should  analyze their particular situations to see whether there is a difference between a direct transfer versus a taxable withdrawal paired with a deductible contribution.

Inventory Donations

The Act extends three provisions that allow businesses to donate inventory with an enhanced deduction. Normally, the deduction would be limited to the basis (cost) of the inventory not to exceed the fair market value. For certain donations, the Act allows an additional deduction of up to 50% of the appreciated value of the inventory.  For the food inventory donation, businesses other than C Corporations are temporarily allowed an enhanced donation, and this has been extended through December 31, 2011. The book inventory and qualified computer contribution provisions have also been extended through 2011. These provisions generally apply only to qualifying C Corporations. The numerous limitations and requirements pertaining to these deductions are extended as well.

Taxation of Certain Payments From “Controlled Entities”

The Act extends a temporary provision that removed specified payments from unrelated business taxable income. Previously, income from rent, interest and royalties received from a controlled organization (typically a taxable subsidiary) were taxable as unrelated business taxable income (UBTI). A change in the law in 2006 provided that such payments would not be taxed if two conditions were met.  First, there had to be a binding contract as of August 17, 2006 (or a renewal on substantially similar terms of a binding contract in effect on August 17, 2006).  Second, the payments had to be reasonable in amount under an arms-length standard of the tax laws. This provision originally expired December 31, 2009 and is extended through December 31, 2011.

Temporary Employee Social Security Tax Reduction

For calendar year 2011, the employee payroll tax rate will be reduced by 2%. The employer rate remains at 7.65% (including the Medicare tax of 1.45%). The “Making Work Pay” tax credit was not extended; as a result, it expires for years after 2010. Therefore, income tax withholding tables are being revised upwards to take into account the expiration of the credit, while the withholding for the employee portion of the payroll tax will decrease. The IRS is releasing new withholding tables based on the new law and has indicated that employers should use the revised tables as soon as possible but not later than January 31, 2011.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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