CRS Updates Report on Expired Charitable Tax Provisions

The Tax Increase Prevention Act of 2014 (P.L. 113-295) temporarily extended tax provisions that had expired at the end of 2013, for one year, through 2014. Absent congressional action, the 52 temporary tax provisions that expired at the end of 2014 will not be available to taxpayers for the 2015 tax year. Temporary tax provisions that are regularly extended for one or two years are often referred to as "tax extenders." This report briefly summarizes the temporary charitable tax provisions that expired at the end of 2014. The report also discusses the economic impact of these charitable tax provisions. The Senate Finance Committee has reported legislation, the Tax Relief Extension Act of 2015 (S. 1946), that would retroactively extend expired tax provisions, for two years, through 2016.

Four charitable tax provisions are discussed in this report:

As an alternative to extending the expired provisions, Congress may allow these provisions to remain expired. Several provisions that might have been considered "traditional extenders" -- that is, they had been extended multiple times in the past -- have not been included in recent extenders packages. Two charitable provisions, the enhanced deduction for donations of computer equipment, and the enhanced deduction for book inventory to schools, which were first enacted in 1997 and 2005 respectively, were allowed to expire as scheduled at the end of 2011.

The one-year extension of expiring tax provisions enacted in 2014, the Tax Increase Prevention Act (P.L. 113-295), reduced federal revenues by an estimated $41.6 billion over the 10-year budget window.² Of that cost, $0.7 billion was attributable to the four charitable provisions discussed in this report (see Table 1). Tax Relief Extension Act of 2015 (S. 1946), as reported, would federal revenues by $96.9 billion (or $86.6 billion after accounting for macroeconomic effects).³ Of this cost, $2.5 billion is attributable to the four charitable provisions discussed in this report (not accounting for any potential macroeconomic effects).

Permanent extension of certain expiring provisions has recently been considered by the House in both the 113th and 114th Congresses. Legislation in the 114th Congress that would make permanent the expired charitable provisions is noted in Table 1. Comprehensive tax reform legislation introduced in the 113th Congress, the Tax Reform Act of 2014 (H.R. 1), would have made permanent the basis adjustment to stock of S corporations making charitable contributions or property and the special rules for contributions of capital gain real property for conservation purposes. The President's FY2016 budget proposes to make permanent the enhanced incentives for conservation easement contributions, with certain reforms.⁴

            Table 1. Cost of Extending Expired Charitable Provisions

Enhanced Charitable Deduction for Contributions of Food Inventory⁷

Corporations that donate food inventory to charity are generally allowed a deduction for the cost (not to exceed the market value). A special rule allows businesses paying the corporate tax an additional deduction equal to half the appreciation (half the difference between market value and cost) if the inventory is given to an organization that directly passes it on to the ill, the needy, or infants, and other criteria are met. The total deduction cannot be more than twice the cost.

The enhanced deduction for food inventory was temporarily expanded to include contributions made by businesses other than C corporations (e.g., sole proprietors, partnerships, and S corporations) in the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73). Further, under the provision, only "apparently wholesome food" qualifies for the enhanced deduction. In recent years, this provision has been extended as part of the "tax extenders."

The provision allowing non-corporate businesses an enhanced deduction for charitable contributions of food inventory was enacted in response to the Gulf Coast hurricanes in 2005 (although nothing in the provision limited the deduction to contributions made as part of hurricane relief efforts). The provision promotes equity; allowing non-corporate businesses the same enhanced deduction that is available to C corporations provides greater equity across different types of business taxpayers. Allowing this enhanced deduction can also simplify compliance, particularly when viewed as an alternative to a "fair market value" deduction, by reducing the scope for disputes regarding valuation between taxpayers and the Internal Revenue Service (IRS).

Allowing deductions for appreciated property lets firms deduct amounts that have not been included in income. If the donated property (in this case, food) had been sold, the income would have been taxed at ordinary rates. Generally, there are additional limitations on charitable contributions of appreciated property, reflecting the fact that by donating property, the donor avoids generating income that would otherwise be taxed.

As is generally the case with gifts of capital gain property, an important concern is the potential overstatement of market value. Firms may only be able to sell donated inventory at a much lower price because the product is damaged in appearance, is older, or has other characteristics that would require deep discounting to sell. Moreover, a firm with market power may not wish to sell its inventory because increasing supply will drive the price down more for a sale than a donation. It is possible that a provision that is extended to non-corporate businesses, which are smaller and more numerous, will be more difficult to monitor for compliance.

For inventory that cannot be practically sold, the barrier to a donation by the firm is the extra costs encountered in distributing the product. Thus, there is a tradeoff between creating an incentive to donate and providing a windfall for businesses that would have donated absent enhanced tax incentives.

Tax-Free Distributions from Individual Retirement Plans for Charitable Purposes⁸

Currently, individuals aged 70 1/2 and older are allowed to make tax-free distributions from individual retirement accounts to charities. The amount is limited to $100,000 per person. The recipient is limited to active charities, and cannot include non-operating private foundations, supporting organizations, and donor-advised funds. The excluded organizations do not directly engage in charitable activities, but instead provide funds to active charities.

The provision was first enacted in the Pension Protection Act of 2006 (P.L. 109-280). Since being enacted in 2006, these temporary provisions have regularly been extended as part of the "tax extenders." In recent years, special rules have allowed qualified charitable distributions made in January to be treated as if they had been made during the previous tax year.

In effect, the distribution is a tax-free "rollover" rather than a charitable contribution. Thus, the benefit is available to taxpayers who do not itemize deductions and therefore would not otherwise be able to take a deduction.⁹ Although this treatment may appear no different for itemizers from simply including the amounts in adjusted gross income and then deducting them as itemized deductions, it can provide several types of benefits even to those who itemize. This treatment reduces adjusted gross income, which can trigger elements of various entitlement programs, including the phase-in of taxation of Social Security benefits and the size of Medicare premiums. Limits on medical expense deductions and casualty losses are also tied to adjusted gross income. There are also income limits on charitable contributions: individuals can contribute no more than 50% of income in cash to charities and no more than 30% in appreciated property. In some states, state income taxes may be reduced. Additionally, the provision allows qualified charitable contributions made from IRAs to satisfy IRA distribution requirements.

There is some debate about the responsiveness of charitable giving to tax benefits, although most evidence suggests that the effect is small.¹⁰ There is no obvious reason for targeting this particular group of taxpayers for an additional incentive. This age group is the group that is required to take distributions from IRAs each year, and could choose to donate distributions to charity, absent this special incentive.

For more information, see CRS Report RS22766, Qualified Charitable Distributions from Individual Retirement Accounts: Features and Legislative History, by John J. Topoleski and Gary Sidor.

Basis of S Corporation Stock for Charitable Contributions¹¹

Under current law, a shareholder in a Subchapter S corporation (a corporation not subject to the corporate income tax) is allowed to deduct his or her pro rata share of any corporate charitable contribution. At the same time, the taxpayer must decrease the basis of stock by the amount of the charitable contribution (which is a way of reflecting the effect on the shareholder's asset position for tax purposes). This extender provides that a taxpayer does not have to reduce basis in the stock to the extent a deduction is taken in excess of adjusted basis of the donated property (e.g., cost).¹² That is, the taxpayer will only reduce the stock value by the adjusted basis of the contributed property.

For example, assume an S corporation with one individual shareholder makes a charitable contribution of property with a $1,000 market value and a $300 basis. The shareholder will be treated as having made a $1,000 charitable contribution. Under the special rule provided by the provision at hand, the shareholder will reduce their basis in the S corporation stock by $300 (rather than the $1,000 market value). The smaller reduction in basis means that if the shareholder were to sell their stock in the S corporation, a lower capital gain would be realized. In this example, the capital gain in the S corporation stock resulting from the charitable contribution would have been $1,000 without the special rule, but is $300 with the special rule.

The Pension Protection Act of 2006 (P.L. 109-280) included this provision effective through 2007, and it has subsequently been extended as part of "tax extenders" legislation.

This provision appears to be consistent with allowing a deduction for the market value of appreciated property without including the appreciation in income. Generally, contributions of appreciated property do not require taxpayers to realize income before contributions are made.

Special Rules for Contributions of Capital Gain Real Property Made for Conservation Purposes¹³

A charitable income tax deduction is generally allowed for qualified conservation contributions, including conservation easements. Qualifying conservation purposes include (but are not limited to) the preservation of land or open spaces for scenic enjoyment, for recreational or educational purposes, or to protect natural habitats. Gifts of appreciated property are generally deductible at the fair market value, but, for individuals, are subject to lower limits (30% of income) than ordinary gifts such as cash (50% of income).

Temporary provisions initially enacted as part of the Pension Protection Act (P.L. 109-280) increase the limit for appreciated property contributed for conservation purposes to 50% for individuals. For farmers and ranchers, including individuals and for corporations that are not publicly traded, the limit is increased to 100% of income. To qualify for the higher deduction, land used or available to be used for agricultural or livestock production must remain available for such purposes. Conservation contributions that exceed the 50% or 100% of income giving limits can be carried forward for 15 years, instead of the usual 5 years, under the special temporary rules. Since being enacted in 2006, these temporary provisions have regularly been extended as part of the "tax extenders."

Conservation easements that restrict development may reduce the value of the underlying land. Economic incentives, including the charitable deduction for conservation contributions, encourage voluntary restriction of development. Landowners with modest incomes, including farmers and ranchers, may not be able to claim the full value of their conservation contributions under the general limits placed on gifts of appreciated property. The increased income limits and longer carry-forward period increases the value of the deduction for donors with modest incomes. Providing increased limits for conservation contributions, however, enhances the charitable benefits associated with these types of gifts, relative to other forms of giving.

Lower income limits for gifts of appreciated property reflect concerns about the overstatement of fair market value. Recently, there have been concerns regarding valuation claims for conservation contributions preserving recreational amenities, such as golf courses. Lower income limits for gifts of appreciated property also reflect the fact that deductions are being claimed for amounts that have not been included in income (the property has not been sold, and capital gains taxes have not been collected).

Author Contact Information

² Joint Committee on Taxation, Estimated Revenue Effects of H.R. 5771, the "Tax Increase Prevention Act of 2014," Scheduled for Consideration by the House of Representatives on December 3, 2014, 113th Cong., December 3, 2014, JCX-107-14R, available at https://www.jct.gov/publications.html?func=startdown&id=4677.

³ Joint Committee on Taxation, A Report to the Congressional Budget Office of the Macroeconomic Effects of the "Tax Relief Extension Act of 2015," As Ordered to be Reported by the Senate Committee on Finance, 114th Cong., August 4, 2014, JCX-107-15, available at https://www.jct.gov/publications.html?func=startdown&id=4807.

⁴ See Department of the Treasury, General Explanations of the Administration's Fiscal Year 2016 Revenue Proposals, February 2015, http://www.treasury.gov/resource-center/tax-policy/Pages/general_explanation.aspx.

⁵ The America Gives More Act, in addition to making permanent three of the charitable extenders, would make several modifications to these provisions. For example, the percentage-of-income limit for contributions of food inventory would be increased from 10% to 15%. Additionally, the America Gives More Act includes language from the Private Foundation Excise Tax Simplification Act of 2015 (H.R. 640), which proposes setting the excise tax rate on net investment income of private foundations at 1%. Under current law, such income is subject to a 2% excise tax. The tax rate can be reduced to 1% if private foundation giving exceeds historical levels.

⁶ America's Small Business Tax Relief Act, as passed in the House, would make permanent two other "extender" provisions: (1) the increased expensing allowances for small businesses under Section 179; and (2) the reduction in S corporation recognition period for built-in gains. Both provisions are discussed in CRS Report R43510, Selected Recently Expired Business Tax Provisions ("Tax Extenders"), by Jane G. Gravelle, Donald J. Marples, and Molly F. Sherlock.

⁷ Internal Revenue Code (IRC) Section 170(e)(3)(C).

⁸ IRC Section 408(d)(8).

⁹ This provision was originally in a package of proposals made by President Bush in 2001, which included a deduction for non-itemizers, which was not enacted. Its original objective, therefore, was not to allow a benefit for non-itemizers.

¹⁰ For a review of the evidence on the effects of tax incentives on charitable giving, see CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2011 Budget Options, by Jane G. Gravelle and Donald J. Marples, and U.S. Congress, Joint Committee on Taxation, Present Law And Background Relating To The Federal Tax Treatment Of Charitable Contributions, 113th Cong., February 11, 2013, JCX-4-13.

¹¹ IRC Section 1637(a)(2).

¹² For more on tax basis, see CRS Report RL34662, Tax Basis: What Is It? Why Is It Important?, by Carol A. Pettit.

¹³ IRC Section 170(b)(1)(E) and 170(b)(2)(B).