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Summary of New Tax Law as it affects churches
by Elaine and Frank Sommerville
Provisions
Affecting Your Donors
Tax Free Distributions from IRAs to Charitable
Organizations
The long awaited provisions
have arrived! Charities have sought this
provision for over two decades, and Congress has thrown the
charities a bone
(so to speak). Donors can now make contributions from their
IRAs without
having to take the contribution into their income; provided,
however, the
contributions meet the following requirements:
* The maximum contribution in any one tax year is
$100,000;
* The contributions must go from trustee to charitable
organization;
* The distribution/contribution must be made after age
70 ˝; and
* The contribution is made in 2006 and 2007.
Extension of the Modification of Charitable Deduction for
Contributing Food
Inventory
The changes made due to Hurricane Katrina relief provisions
for
contributions of food inventory and qualified book inventory
have been
extended to 2007.
Limitation on Deduction for Charitable Contribution of
Clothing and
Household Items
Congress has slammed the door on all those contributions of
clothing and
household items taxpayers are famous for claiming. The IRS
was tired of
arguing with taxpayers regarding the value of those bags of
donated
clothing. Therefore, the new law contains the following
provisions:
* No tax deduction is allowed unless the
item is in good used condition or better. Translation – No
tax deduction
for the donor’s junk.
* The Secretary may disallow contributions with minimal
monetary value. Translation – The IRS does not have to argue
about the
value that trash bag full of clothes.
* The Secretary may not disallow the contribution if a
single item is worth more than $500 and has a qualified
appraisal.
Translation – If you really want a deduction for an item,
get a third party
to tell you what its worth.
* These provisions apply to contributions made after the
effective date of the Act. Translation - These rules apply
now!
Recordkeeping Requirements Necessary to Claim the Charitable
Contribution
Weary of arguing with the taxpayers about their cash
offerings, the IRS
convinced Congress to disallow contributions for monetary
gifts that do not
meet the following conditions:
* Donors must maintain a bank record or written
communication
from the organization listing the name of the organization,
the date,
and the amount of contribution;
* The rules still require the mandatory qualifying
receipts from the organization for any gift of $250; and
* This provision is effective for contributions given in
2007 and forward.
As a result of the new provisions, organizations must now
receipt virtually
every donation. A qualifying receipt must contain the
following statement:
“There were no goods or services given in exchange for the
listed
contributions other than intangible religious benefits.”
More than 10 years after the passage of the law requiring
the above
statement on contribution receipts, many organizations are
still not in
compliance. The law has now been around long enough that we
are seeing the
courts enforce this requirement. If the statement is not on
your
organization’s receipts, your donors will lose their
charitable
contributions deduction!
Revised Definitions of “Qualified Appraisal” and
“Qualified Appraiser” for
Form 8283
Taxpayers claiming certain non-cash contributions of $5,000
or more must
obtain a “qualified appraisal” from a “qualified appraiser”
in order to
claim the contribution on Form 8283. The essence of these
rules is to have
only those certified appraisers giving appraisals for tax
purposes. For
taxpayers who are planning a non-cash contribution of
property valued at
$5,000 or more, it is advisable that these rules be
thoroughly reviewed
prior to the donation of the property. The new statutory
definitions are in
effect for contributions made in 2006.
Exempt Organization Reforms
Definition of a Convention or Association of Churches
The IRS has historically
believed that a convention of churches could not
include voting members that were not associated with a
specific member
church. The new law includes a clarification that having
individual members
does not negate the classification as a convention or
association of
churches
Notification Requirement for Entities Not Currently
Required To File
Most exempt organizations,
other than churches, are required to file Form
990, Return of Organization Exempt from Income Tax,
annually. However,
smaller exempt organizations whose average gross receipts is
less than
$25,000 over a 3 year period are not required to file Form
990. Therefore
the IRS has difficulties tracking these smaller
organizations. The Act now
requires the filing of an annual return for these
organizations. The
provisions include:
* Beginning for tax year 2007, these organizations will
annually provide to the IRS in an electronic format, certain
information
including:
1. the organization’s name;
2. any DBA name under which the organization may operate;
3. the organization’s mailing address;
4. the website address of the organization;
5. the EIN assigned to the organization;
6. the name and address of the organization’s principal
officer; and
7. evidence of the continuing basis of the organization’s
exemption
from the filing requirements under §6033(a)(1).
* Upon termination of the existence of the organization,
notice of termination shall be furnished to the IRS, along
with the annual
filing for the final year.
* Failure to file a return or annual notice for 3
consecutive years will allow the IRS to revoke the
organization’s exempt status.
* In order to be reinstated after being revoked, the
organization must apply for reinstatement of its exempt
status.
* Retroactive reinstatement may be granted if reasonable
cause for failure to file can be proven.
* The revocation of the exempt status for lack of filing
is not subject to an action for declaratory judgment relief.
* The Secretary of the Treasury will publicize the
penalty for failing to file the notice in the appropriate
form and in a
timely manner
Supporting Organizations Classified Under 509(a)(3)
While the new law has several provisions for these
organizations, one of the
most outstanding changes is the mandatory filing of Form 990
for
organizations, no matter the level of income. This filing
requirement is in
effect for any taxable year ending after August 17, 2006.
Therefore, all
supporting organizations will be required to file Form 990
for 2006, no
matter the level of income for the year.
Any organization classified as a supporting organization
should seek
individual counsel to determine how the new law will affect
its operations.
Unrelated Business Income
While an organization’s Form 990 has always been open
to public inspection,
an organization’s Form 990-T has not. The new law
places the same public
inspection requirements on the Form 990-T as it does for the
Form 990.
Excise Taxes Relating to Donor Advised Funds
The IRS has been scrutinizing donor advised funds. In order
to deal with
the perceived abuses in the system, Congress enacted a set
of excise
penalties on prohibited transactions that occur in donor
advised funds.
Additionally, Congress has ordered the Secretary of the
Treasury to
instigate of study of these organizations to be completed by
August 17,
2007.
Any organization maintaining donor advised funds should seek
counsel
immediately to review its compliance with the new law.
Excess Benefit Transactions
Under the law, certain control parties are subject to an
intermediate
sanction for agreeing to allow an excess benefit transaction
with another
control party to occur. Under the old law, these persons
could be assessed
a sanction not to exceed $10,000. The new law increases this
cap from
$10,000 to $20,000.
- Not legal advice, just legal
information unless you paid for it.
Frank Sommerville, JD, CPA
Board Certified Tax Law
Texas Board of Legal Specialization
Dallas and Houston, Texas
1-877-537-4360
fsommerville@nonprofitattorney.com
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