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Focus on Not-For-Profits: New Tax Law Affects Exempt Organizations

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On August 17, 2006, the President signed the Pension Protection Act of 2006. Included within this bill are many of the 2005 Senate Finance Committee proposals for charities and other tax-exempt organizations. Some of the changes provide incentives for donors.
August 17, 2006

On August 17, 2006, the President signed the Pension Protection Act of 2006. Included within this bill are many of the 2005 Senate Finance Committee proposals for charities and other tax-exempt organizations. Some of the changes provide incentives for donors; however, the majority of the provisions relate to charitable reforms. A few provisions apply to tax-exempt entities other than charitable organizations. The following is an overview of some of the widely applicable changes.

Tax-Free Distributions From IRA's for Charitable Purposes 

A new rule allows certain IRA owners to exclude from income direct transfers (distributions) which would otherwise be included in taxable income when made from a traditional IRA or a Roth IRA to qualifying charities.

  • The IRA owner must be at least age 70-1/2 at the time the distribution is made.
  • Not all charitable organizations qualify to receive these distributions.
  • The limitation of $100,000 applies separately to the 2006 and 2007 taxable years.
  • The distribution is not deductible as a charitable contribution.
  • There are other considerations that may need to be taken into account in order to ensure that the benefits of this incentive will apply.

The provision is effective for distributions made in taxable years beginning after December 31, 2005 but does not apply to distributions made in taxable years beginning after December 31, 2007. 

Donors Must Have Substantiation of Cash Charitable Contributions under $250 

The requirement to have a written record of cash donations between $1 and $249 is being modified. Under the new law, the documentation requirements will be satisfied only if a "bank record" or a "written communication from the donee" shows:

  • The name of the donee organization
  • The date of the contribution, and
  • The amount of the contribution

This rule will apply to donations in cash, by check or other monetary gifts for taxable years beginning after August 17, 2006. (Calendar year 2007 for most individuals.) Organizations may be faced with an increased demand for receipts for small gifts of cash. There does not appear to be a deminimis exception for donors who want to take a deduction. The effect of this change may be that donors who deduct charitable contributions as itemized deductions will be less willing to make cash contributions without a contemporaneous receipt issued by the charity.    

Recapture of Tax Benefit for Charitable Contributions of Tangible Personal Property

Under existing law, donors of tangible personal property (such as works of art) may be entitled to a deduction equal to the fair market value of the property donated. A key requirement for the fair market value to be allowable as the amount of the contribution deduction is that the property is used by the donee in its charitable or exempt activities. Previously, there has been a 2 year reporting period if the donee disposes of the property, but there were no explicit consequences upon a disposition within that 2 year period. Generally, for contributions of property with a value of more than $5,000 after September 1, 2006, new rules will apply.

  • Such donated property disposed of within 3 years of the date of contribution will generally trigger recapture of the donor's deduction in excess of the donor's basis. Limited exceptions are provided.
  • The donee will have a 3 year reporting period for dispositions instead of 2 years.
  • A $10,000 penalty may be imposed for incorrectly identifying property as being used in the donee's charitable or exempt functions.

Donations of Clothing and Household Items 

According to the IRS, over $9 billion of contributions of clothing and household items were claimed in 2003. Household items include furniture, electronics, appliances, linens and other similar items.

 

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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