Exempt Organizations Advisory - Senate Finance and House Ways & Means Introduce Katrina Tax Relief Plans

On September 12, Senator Chuck Grassley, Chairman of the Committee on Finance, and Senator Max Baucus, Ranking Democrat on the Committee, introduced the Grassley-Baucus Tax Relief Package for Individuals Affected by Hurricane Katrina. It is expected that the Senate will approve the relief package on September 15.

According to Grassley, "the immediate relief package that we’re announcing today will help get short-term aid to hurricane victims by encouraging food donations and the employment of displaced individuals, for example. We also want to help protect Katrina victims from undeserved IRS trouble." After this package is completed, Grassley promised that the focus would be on "longer-term tax incentives to help rebuild homes and businesses. We’re looking at depreciation changes, tax-exempt bond authority (arbitrage rebate), and enterprise-zone initiatives."

A summary of the relief package provisions that relate to charitable giving is as follows:

• Encourage Food Donations by Businesses. The proposal provides an enhanced deduction for donations of food inventory for businesses through December 31, 2005. Under present law, a taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis (typically cost) in the inventory. However, for contributions of food inventory, C corporations may claim an enhanced deduction equal to the lesser of (1) basis plus one-half of the item’s appreciated value (i.e., basis plus one half of fair market value in excess of basis) or (2) two times basis. The proposal would allow all taxpayers to claim an enhanced deduction for donations of food inventory equal to the lesser of fair market value or twice basis. Senators Baucus and Grassley want to encourage farmers, ranchers, food producers, and sellers to donate surplus food inventory during this period when so many are relying on assistance.
• Encourage Book Donations by Businesses. The proposal provides an enhanced deduction for donations of book inventory through December 31, 2005. Under present law, taxpayers may claim an enhanced deduction equal to the lesser of (1) basis plus one-half of the item’s appreciated value (i.e., basis plus one half of fair market value in excess of basis) or (2) two times basis for donations of book inventory. The proposal would allow taxpayers to claim an enhanced deduction for donations of book inventory equal to the lesser of fair market value or twice basis. Senators Baucus and Grassley understand that with the influx of many dislocated children in the wake of hurricane Katrina, many schools across the country lack the supplies they need to handle the additional student population. This proposal is intended to encourage donations of books to schools and other educational programs during this period.
• IRA Charitable Rollover. The provision would exclude from gross income otherwise taxable Individual Retirement Account (IRA) withdrawals from a traditional or a Roth IRA for qualified charitable distributions. Under the provision, taxpayers who are 70½ and older would be allowed to rollover amounts from their IRA accounts directly to a qualified charitable organization on a tax-free basis. In addition, the provision allows taxpayers aged 59½ and older to transfer IRA funds to a charitable remainder trust and give a remainder interest in the trust to charity without tax consequence. Senators Baucus and Grassley believe that removing obstacles for taxpayers to donate their IRAs to charity during this difficult period will provide an important incentive to give to charities. The provision would be effective through December 31, 2005.
• Corporate Charitable Contributions. The amount allowed as a charitable deduction for a corporation in any taxable year generally may not exceed ten percent of the corporation’s taxable income. The proposal would temporarily increase the percentage limitation to fifteen percent of the corporation’s taxable income for one taxable year ending on or before December 31, 2006.
• Individual Income Limits for Cash Contributions. The proposal raises the permitted cash contribution level to public charities for individuals from fifty percent to sixty percent of adjusted gross income for tax years ending on or before December 31, 2005.
• Encourage IRS Information-sharing with State Charity Officials. This proposal allows the IRS to disclose to appropriate state officials information regarding organizations for which the IRS has denied or revoked tax-exempt status or certain other actions the IRS may have taken. This provision is intended to help the IRS and state officials working together to combat fraudulent charitable organizations taking advantage of a generous public.
• Taxpayer Assistance. Some of these provisions encourage charitable giving, allow taxpayers to access retirement funds without penalty, and expand the availability of tax-exempt bonds for rebuilding homes. In addition, the IRS is expediting reviews of applications from new organizations seeking tax-exempt status as well as requests from donors seeking to verify an organization’s tax-exempt status. This proposal dedicates all fees from employee plan and exempt organization letter rulings and determination letters to the IRS for its own disaster recovery, tax relief administration and assistance and for administration of tax-exempt entities and charitable donations. Current law provides that only a portion of these fees are dedicated for the use of the IRS. This proposal is intended to ensure that families and businesses receive the full benefit of these proposed tax relief provisions, by giving the IRS additional resources to provide significant taxpayer assistance to those affected and to administer effectively the tax relief provisions proposed today.
• Increased Mileage Rate for Calculating Charitable Contribution Mileage Deduction. The mileage rate individuals may use to compute a tax deduction for personal vehicle expenses associated with charitable work is statutory and has not been increased since 1997. This proposal sets the charitable mileage rate at fifty percent of the standard business mileage rate that is determined periodically by the Internal Revenue Service. Making the rate flexible by linking it to the business rate takes fluctuations in gas prices into account and will encourage charitable activity. The business rate is currently 48.5 cents per mile.
• The full text of the Grassley-Baucus relief package can be seen here.

Committee on Ways and Means Introduces Katrina Emergency Tax Relief Act of 2005
On September 14, the House Ways and Means Committee introduced the Katrina Emergency Tax Relief Act of 2005. The bill, which is scheduled for a vote on September 15, includes several provisions to encourage charitable giving.

According the Committee’s summary, the incentives for charitable donations related to Hurricane Katrina are as follows:

• Increased cash donations by individuals. Under current law, individuals may deduct charitable donations up to 50 percent of their adjusted gross income. Deductions for charitable donations are further limited by the phaseout of itemized deductions. Under the proposal, cash donations related to Hurricane Katrina are exempt from the 50-percent income limitation and the phaseout of itemized deductions if the donation is made before January 2006.
• Increased cash donations by corporations. Under current law, corporations may deduct charitable donations up to 10 percent of their taxable income, as adjusted. The proposal waives the 10-percent income limitation for cash donations related to Hurricane Katrina if the donation is made before January 2006.
• Increased the mileage reimbursement rate for charitable donation deductions. Individuals may claim a tax deduction for the costs associated with using a personal vehicle for charitable work. The deduction is calculated by using a mileage reimbursement rate of 14 cents-per-gallon. The reimbursement rate for business use is set periodically through IRS guidance and currently stands at 48.5 cents-per-gallon. The proposal sets the mileage reimbursement rate for charitable contributions at 70 percent of the standard business mileage rate.
• More information, including the full text of the bill, can be found here.

Though the House plan does not include as many incentives as the Senate version, it provides higher deductions for charitable donations by individuals and corporations and increases the charitable mileage reimbursement rate from 50 to 70 percent of the standard business mileage rate.

For more information on this topic, please contact Catherine W. Wilkinson or Suzanne Ross McDowell.

The Exempt Organization Advisory is a general summary of the law and is not intended as specific legal advice for any organization.

Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

For more information on this topic, please contact the authors or the attorneys with whom you usually work at Steptoe.

Questions and comments about the Exempt Organizations Advisory are always welcome and should be sent to bstone@steptoe.com.