On July 17, the US House of Representatives passed the America Gives More Act of 2014 (“Act”). The package of bills is designed to increase donations to Section 501(c)(3) organizations. While the prospects of the bill being approved by the Senate may be unlikely, given the current gridlock and partisanship in Washington, its future implications for charitable giving are quite noteworthy.
The Act contains the following five charitable giving provisions:
1. Extends Charitable Deduction. Currently, charitable contributions may only be deducted if they are made on or before December 31st. The bill would extend the deadline from December 31 to April 15. Taxpayers could then claim charitable deductions on their return for gifts given after the close of the tax year. The idea is to encourage taxpayers to give additional charitable contributions once they have closed their books and have a firm understanding of their tax situation for the preceding year.
2. Food Donations. Many businesses and farmers donate excess food inventory to food banks and other charities. Without such donations, much food would otherwise be wasted. The bill increases the deduction limit for food donations from 10 to 15 percent. The bill also simplifies the way businesses and farmers determine the value of the food donated for the charitable deduction.
3. IRA Distributions. The bill retroactively allows seniors to distribute funds from IRAs to certain public charities on a tax-free basis. This was a temporary tax provision that had expired on December 31, 2013. The bill makes this tax benefit permanent and applies retroactively to cover the 2014 tax year.
4. Excise Tax for Private Foundations. Federal law currently imposes a 2% excise tax on the net investment income of private foundations. This generally includes interest, dividends, rents, royalties (and income from similar sources), and capital gains, less expenses incurred to earn the income. The Code allows a private foundation to reduce the excise tax rate to 1% provided a number of certain complicated and confusing conditions are satisfied. The bill would reduce the tax to a simple, flat rate of 1% applicable to all private foundations.
5. Conservation Easements. The bill retroactively extends and makes permanent certain provisions associated with charitable giving incentives for conservation easements.
The Bill’s Status and Relationship to Tax Reform Act of 2014
While the House passed the Act, as stated above, the prospects of the bill being approved by the Senate are unlikely given the current gridlock and partisanship in Washington. There is, however, an interesting understory to the legislation that is worth noting and continuing to follow.
Many of the foregoing charitable giving incentives stem from Republican Congressman Dave Camp’s discussion draft of the Tax Reform Act of 2014 released in February of this year. The Tax Reform Act is an impressive effort toward comprehensive tax reform. It includes a wide range of proposals that would significantly affect tax-exempt organizations and charitable giving. In addition to the foregoing charitable giving incentives, the draft includes significant changes to the unrelated business income tax, executive compensation, supporting organizations, college endowments, donor advised funds, 501(c)(4) organizations, and several other legal issues for tax-exempt organizations. The draft, when implemented as a whole, was designed to be revenue-neutral.
While additional action on the discussion draft itself is unlikely, the draft contains legislative language with revenue estimates associated with each proposed change. In this way it is designed to shape future legislation. Future bills could adopt provisions of the discussion draft piecemeal. The America Gives More Act of 2014 is the first such bill and contains two of the draft’s charitable giving provisions (extending the charitable deduction and lowering the excise tax for private foundations).
Interestingly, the draft had proposed eliminating the other three provisions in the America Gives More Act (the enhanced deduction for food donations, the IRA distribution exclusion, and the limited conservation easements). Given this phenomenon, we note a couple of important take-aways: First, it is easier for Congress to vote in favor of a bill that gives away, rather than takes away.
Second, even if the America Gives More Act never becomes law, nonprofits should familiarize themselves with the various proposals affecting charitable giving and exempt organizations in Camp’s draft Tax Reform Act of 2014. There is a good chance that the sector will continue to see many of these provisions finding their way into future legislation.