Exempt Organizations Advisory - House and Senate Agree on Katrina Tax Relief

On September 21, the House and Senate passed H.R. 3768, as amended, which will provide tax relief for the families and individuals affected by Hurricane Katrina and encourage additional charitable donations to help victims of the hurricane. It is expected that the President will sign the bill by the end of the week.

The following is a brief summary of the charitable giving incentives included in the bill:

• The bill suspends the section 170(b) deduction limitations on charitable deductions applicable to individuals, and the section 68 phase-out of itemized deductions, for certain cash contributions made in 2005. Under current law, individuals may deduct charitable donations for a taxable year of up to 50 percent of their adjusted gross income. Deductions for charitable donations are further limited by the section 68 phase-out of itemized deductions. Under the bill, cash donations made by individuals to most charities during the period from August 28, 2005 through December 31, 2005 are exempt from the 50-percent income limitation and the phase-out of itemized deductions if the individual makes an election to have the new provision apply. Significantly, this provision does not apply to (1) the deduction for contributions to supporting organizations described in section 509(a)(3), or (2) the deduction for contributions to certain donor-advised funds, i.e., deductions for such contributions remain subject to current limitations. Under the provision, an individual’s total charitable deductions for the year cannot exceed 100 percent of the individual’s adjusted gross income.
• The bill suspends the section 170(b) deduction limitations on charitable deductions applicable to corporations for certain cash contributions made in 2005. Under current law, the annual charitable deduction for corporations is limited to 10 percent of taxable income. Under the bill, cash donations made by corporations to most charities for relief efforts related to Hurricane Katrina during the period from August 28, 2005 through December 31, 2005 are exempt from the 10-percent taxable income limitation. As with individual donations, this provision does not apply to the deduction for contributions to supporting organizations described in section 509(a)(3), or to contributions to certain donor-advised funds, and the corporation must make an election to have the new provision to apply.
• The bill allows an individual deduction for providing no-cost housing to individuals displaced by Hurricane Katrina. Under the bill, an individual taxpayer may deduct $500 per individual (per taxable year) for providing housing free of charge to individuals who were displaced from their residences by Hurricane Katrina. The deduction is available for the 2005 and 2006 tax years. The housing must be provided for a period of at least 60 consecutive days, and the deduction is limited to an aggregate amount of $2,000. For example, an individual taxpayer who provides housing to four displaced individuals for 61 consecutive days in 2005 would be entitled to a deduction of $2,000 for 2005. If the individuals remain with the taxpayer in 2006, however, no deduction would be allowed for 2006.
• The bill increases the mileage reimbursement rate for charitable use of a personal vehicle, and excludes mileage reimbursements from a volunteer’s income. Under current law, 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-mile. The reimbursement rate for business use is set periodically through IRS guidance and currently stands at 48.5 cents-per-mile. The bill sets the mileage reimbursement rate for charitable contributions at 70 percent of the standard business mileage rate (i.e., currently 34 cents-per-mile). If the individual is a volunteer and is reimbursed for the use of the personal vehicle, the bill ensures that the individual does not have to pay income tax on the reimbursement. Both provisions are effective through December 31, 2006.
• The bill temporarily extends the deduction for charitable donations of food inventory to include donations by S-corporations, partnerships and sole proprietors. Under current law, C-corporations may deduct the cost of food inventory donations. The amount of the deduction is equal to the lesser of two times the corporation’s basis, or basis plus one-half of the added value. The bill extends the current-law deduction for food donations to S-corporations, partnerships and sole proprietors through the end of the 2005 calendar year. The amount of food donations made by an S-corporation, a partnership, or a sole proprietorship that is eligible for the deduction is limited to 10 percent of the taxpayer’s aggregate net income for the taxable year from all trades or businesses that make donations of food during the taxable year.
• The bill allows a deduction for donations of educational books to public schools. Under current law, the deduction for a contribution of inventory is limited to cost. The bill allows a charitable deduction through the end of the 2005 calendar year for donations of inventories of educational books to public schools. The amount of the deduction is equal to the lesser of two times the basis or basis plus one-half of the added value. The bill includes a substantiation requirement under which the donee must certify that (1) the books are suitable for use in the donee’s educational programs, and (2) the donee will use the books in its educational programs.

The text of the final bill can be found here.

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.