New Charitable Reforms and Giving Incentives
Some useful new rules that require more paperwork but will ultimately benefit donors, regulators and the nonprofit field are included in the recently enacted federal Pension Protection Act of 2006. AIP is particularly pleased that charities must now publicly disclose their unrelated business income tax form called Form 990-T. Many charity scandals have started in the business side of an organization's operation. This new accountability requirement may serve to discourage some future wrongdoing. The other provision that AIP believes will improve the nonprofit sector is that the IRS is now allowed to share information with state charity regulators about its findings when they revoke or deny a charity's tax-exempt status. This is badly needed because most regulation of charities takes place at the state level.
Some donors will be happy to learn that the Act may allow them to use their IRA to make up to $100,000 in tax-free distributions to charity. Though, many more donors will be unhappy that this tax break is limited to individuals 70.5 years or older and donations must be made to public charities (private foundations and donor-advised funds are excluded) within tax years 2006 and 2007.
Donors will now need to keep records for tax purposes of all their contributions of any amount. For contributions under $250, records may be in the form of a bank record, cancelled check, or written communication from the charity. The written communication may be in the form of a receipt or letter that must include the charity's name, and the amount and date of the contribution. For contributions of $250 or more, the IRS still requires that you obtain a receipt from the charity. (A cancelled check will not suffice.)
Donors who give clothing and household items to charity that are not in good used condition and worth less than $500 will not be able to receive a tax deduction. If a single item of clothing or household article is worth more than $500, a donor must submit an independent appraisal with their personal tax form in order to qualify for a deduction. This rule is sorely needed to put a stop to taxpayers having to subsidize tax deductions on donations of people's worn out clothes and household junk to charity.
Donors who give a charity any property worth $5,000 or more and want to receive a tax deduction based on its fair market value must submit a qualified appraisal and also make sure that the recipient charity uses the property for 3 years (the rule was formerly 2 years). If the charity sells the property before 3 years or fails to explain to the IRS why it could not use the property for this time period, the donor will only be able to take a tax deduction on the cost of the property.
Beginning in 2007, Charities with gross yearly income under $25,000 will be required to annually file very basic non-financial information with the IRS. Charities that do not file for three years in a row will lose their tax-exempt status. This will help donors determine if a very small charity has officially maintained its tax-exempt status. This law is needed because many defunct small charities never bother to inform the IRS that they have ceased operating.
The Act also doubles the maximum penalty per transaction (from $10,000 to $20,000) that charity managers can be fined by the IRS for an excess benefit transaction, i.e. overpaying related parties for products or services.