Raffa Resources
Raffa Resources
Raffa Resources
​​Extension of Key Tax Provisions for Exempt Organizations
By: Aaron Fox, Jonathan List and Ariana Warren

The 113th Congress is currently reviewing Bill H.R. 5771, which includes key provisions for exempt organizations that may have a material impact on the treatment of certain financial and reporting decisions. The Bill is related to the previous legislation American Taxpayer Relief Act of 2012 (ATRA of 2012), which contains certain provisions that expired December 31, 2013. Congress’ approval of this Bill will extend these provisions from the ATRA of 2012 to December 31, 2014.
 
For exempt organizations that work closely with controlled subsidiaries, the provision with the greatest impact in recognizing taxable income is Sec. 131: Extension of modification of tax treatment of certain payments to controlling exempt organizations.

If passed, the Bill would extend the allowance of the “fair market value exception” for certain payments received by a parent organization from a controlled organization (specifically, a Section 512(b)(13) controlled organization more than 50% owned). These payments include rent, royalties, annuities and interest. Under the ATRA of 2012 and preceding legislation, only the portion of payments received or accrued in a taxable year exceeding the amount of the payment that would have been paid under section 482 (i.e., at arm’s length) would be considered UBTI. Without this exception, many transactions between a parent and a subsidiary may result in additional taxable income as the full payment would be recognized as taxable income to the parent.  It is important to note that this exception only applies to binding written contracts in effect by August 17, 2006.
 
Some other notable extenders that apply to exempt organizations include:
 
  •  Sec. 106. Extension of the special rule for contributions of capital gain real property made for conservation purposes (sec. 170(b)(1)(E) and 170(b)(2)(B))
    • This provision allows contributions of capital gain property to 170(b)(1)(a) exempt organizations to be deductible up to 100-percent of a corporate taxpayer’s taxable income or an individual taxpayer’s contribution base in the case of a qualified conservation contribution by a qualified farmer or rancher and up to 50-percent for non-qualified farmer or rancher.
         
  • Sec. 108. Extension of tax-free distributions from individual retirement plans for charitable purposes (sec. 408(d)(8))
    • This provision allows an exclusion from gross income for otherwise taxable distributions from a traditional or Roth IRA in the case of qualified charitable distributions, not to exceed $100,000.
       
  • Sec. 115. Extension of new markets tax credit (sec. 45D(f)(1))
    • This provision provides a tax credit in the aggregate amount of 39-percent of qualified investments for investments promoting economic and community development in low-income communities.

  • Sec. 126. Extension of enhanced charitable deductions for contributions of food inventory (sec. 170(e)(3)(C))
    • This provision increases the deduction for certain contributions of food inventory to the lesser of (1) basis plus one-half of the item’s appreciation or (2) two times basis.
        
  • Sec. 137. Extension of basis adjustments to stock of S corporations making charitable contributions of property (sec. 1367(a))
    • This provision adjusts the basis of stock in an S corporation by the adjusted basis of property contributed to charity.

Implications

If Bill H.R. 5771 is passed by Congress it will extend many provisions that have provided comfort to exempt organizations in the past through December 31, 2014 and will allow exempt organizations to continue to operate as they have been in years past. While it is unlikely that the Bill will be struck down, organizations should monitor the legislative process to prepare for any possible changes if the above Sections apply to your organization.  The full text of the bill can be found here.
 
If you have any questions about how these changes may impact your organization, please contact Frank Smith, Partner at fsmith@raffa.com or 202-955-6735 or Aaron Fox, Senior Manager at afox@raffa.com or 202-955-6701, members of the Raffa Nonprofit Tax Practice.