The American Taxpayer Relief Act of 2012 (“TRA”) (H.R. 8) passed by the Senate on January 1, 2013, passed by the House of Representatives early on January 2, 2013 and signed by President Obama, in large part addresses income and other tax rates without direct effect on tax-exempt organizations. Several provisions, however, will be of interest to tax-exempt organizations: the extension of several incentives to make certain charitable donations; the return of deduction limitations for certain individuals, including the charitable deduction; the absence of new limitations on tax-exempt financing; and the end of grants and loans to co-op nonprofit insurers exempt under the new provisions of Section 501(c)(29) of the Internal Revenue Code.
The Pension Protection Act of 2006 contained several time-limited provisions for favorable tax treatment of certain contributions. These provisions generally expired at the end of 2007 and have been extended several times for two-year periods, most recently in 2010 . Some, but not all, of these provisions are extended by the TRA. Specifically, TRA extends the following through the end of 2013:
• IRA Charity Contribution (Code Section 408(d)(8)(F), permitting a distribution of up to $100,000 tax-free from an IRA to a qualifying charity by those over 70 ½. As in the previous extension, taxpayers have the month of January 2013 to elect to make charitable distributions treated as effective in 2012;
• Contribution of Conservation Easement (Code Section 170(b)(1)(E)(vi)), permitting favorable deductions for donating conservation interests in capital gain real property to charity;
• Contribution of Food Inventory (Code Section 170(e)(3)(C)(iv)), permitting enhanced deductions for contributions of food inventories; and
• Contributions of property by S corporations (Code Section 1367(a)), limiting an S corporation shareholder’s reduction in basis of the S corporation’s stock to a pro rata share of basis (rather than fair market value) of property contributed by the corporation.
However, two provisions for enhanced charitable deductions – contributions of book inventories to public schools and corporate contributions of computer inventory – were not extended. These were in Code Sections 170(e)(3)(D)(iv) and 170(e)(6)(G), respectively.
The TRA also extends the special rule limiting an exempt organization’s taxable income on interest and other payments from controlled corporations to only the amount of payment in excess of fair market value, provided that the contract for the payments was in effect in 2006 (Code Section 512(b)(13)).
Overall Deduction Limitation
After an absence of several years, the overall limitation on itemized deductions – the so-called Pease provision – is back permanently. This will affect charities by reducing high-income individuals’ benefit from charitable contribution deductions. As before, if individuals’ adjusted gross income exceeds a threshold amount, their itemized deduction total will be reduced by the lesser of: 80 percent of otherwise allowable deductions; and 3 percent of adjusted gross income in excess of the threshold amount. This can reduce the amount of a charitable contribution that can be deducted to as little as 20 percent of the contribution amount. Threshold amounts have been almost doubled from the previous levels; thus, no limitation applies for married couples filing jointly with adjusted gross income of up to $300,000. On the other hand, estate tax charitable deductions remain unlimited.
Governmental entities issuing tax-exempt bonds, and Section 501(c)(3) organizations which borrow the proceeds of tax-exempt bonds, were concerned that the tax-free nature of the interest on such bonds would be further limited. These bonds are, of course, an important source of capital for governments and Section 501(c)(3) organizations. The TRA did not impose any additional limitations, but limitations may be considered in further talks about sequestration and spending reductions, or if wholesale tax reform goes forward.
Co-op Health Insurers
The Affordable Care Act, or health reform act, allocated federal funds for grants and loans to a new type of nonprofit cooperative health insurer, to be made before July 1, 2013. Code Section 501(c)(29) provides for tax exemption for such cooperative health insurers but only if they have received a grant or loan under the Affordable Care Act provisions. The TRA rescinded budget authority for grants and loans effective immediately, so organizations that planned to become Section 501(c)(29) organizations but had not yet received a grant or loan will not have this opportunity.