As filing season winds down this month, tax practitioners (and advisors who work with practitioners on behalf of their clients) can breathe easier, but only for a moment. Once those 2006 returns are complete and tax pros catch up on some shut-eye, it is time to deal with new legislation that is already having a big impact on 2007 and thus the next filing season (which will be here sooner than you think). The Tax Talk Today series of live, interactive Webcasts has dedicated its early 2007 programs to big federal changes for this year–including sweeping changes for tax-exempt organizations and the people who contribute to them, and a new tip-reporting program for smaller food and beverage establishments.
Legislative Overhaul for Tax-Exempt Orgs
Tax-exempt organizations, including those entities exempt from tax under 501(C)(3), now face some of the most significant tax-law changes these groups have seen in 35 years. New provisions in the Pension Protection Act of 2006 increase taxes and penalties, expand filing requirements (especially for supporting organizations), and affect the charitable donation of funds and property.
Form 990, Return of Organization Exempt from Tax, received quite a few changes as a result of the Pension Protection Act of 2006. But a makeover wasn’t the only Form 990 change: requirements for filing this form now include supporting organizations, i.e., those organizations which exist to raise funds for a particular charity, of any size, no matter how small. This means that, with the exception of churches, all tax-exempt organizations now have an annual federal filing requirement.
“The new bottom line is that every organization that is tax-exempt should be filing something with us every year,” said Theresa Pattara, project manager, internal revenue, tax-exempt and government entities division, in the IRS’s Office of Exempt Organizations. Pattara also noted that churches still need not file annual returns or notifications with the IRS.
One type of tax-exempt entity that received special attention in the new legislation is the credit counseling organization. In an unusual move, Congress created a new code section–Section 501(q)–that governs tax exemptions for credit counseling organizations. The IRS commented that it will be interesting to see if Congress continues this trend of legislation specific to a certain type of charitable organization.
Special provisions in the new legislation affect qualified persons for donor-advised funds and for their sponsoring organizations. Any donor or donor advisor to a donor-advised fund, as well as any family member of the donor or donor advisor, are now disqualified persons with respect to the fund and its sponsoring organizations. Any transaction between the donor-advised fund and a disqualified person is an automatic “excess benefit transaction,” and that money has to be repaid in its entirety. A tax will also apply.
Another new rule impacts contributors to donor-advised funds. Donors must obtain a written acknowledgement from the charity stating that the charity has exclusive legal control over the funds that were donated.
“This was obviously intended to counteract a perception by many people–an incorrect one–that the money was still the donor’s and that they still had control over it, when in fact it was transferred to the charity,” said Susan Kassell, senior counsel, Income Tax & Accounting, IRS Office of Chief Counsel.
Tougher Rules on Donations
Tax practitioners will also have to help their individual clients adhere to new rules regarding contributions of funds or property to tax-exempt organizations. In order to claim a tax deduction for cash contributions (defined as contributions made via cash, check, electronic fund transfer, or credit card), the donor must obtain and keep either a written communication from the charity or a bank record (bank statement, cancelled check, or credit card statement) that includes the date and amount of the donation and the name of the charity.
“Before the new law, personal notations prepared by the donor were generally considered to be acceptable,” said Kassell. “Under the new law, they are not acceptable.”
For contributions of property, donated clothing or household goods must be in “good used condition” in order to be deductible. The exception: a donated item for which the claimed deduction is greater than $500, but only if the donor submits a qualified appraisal of the item. For any contribution of property with a claimed value over $5,000, a qualified appraisal must be obtained. The Tax Talk Today panel noted that some charities are communicating the new requirements to their donors in an effort to help their supporters stay informed.
“There is a lot of concern about what the charities need to be doing to assist their donors in complying with the rules,” said March panelist Patricia Read, senior VP, public policy and government affairs, for the charity forum Independent Sector.
Several notices from the IRS, including Notices 2006-96 and 2006-110, will provide good information on these and other tax-exempt issues. Tax Talk Today panelist Rochelle Korman, a partner with the New York law firm of Patterson Belknap Webb & Tyler LLP, strongly recommended that practitioners get a copy of the Joint Committee on Taxation’s report on the subject to learn as much as they can about how the new legislation will impact their clientele. Small establishments get their own pilot program for tip reporting
The IRS launched the Attributed Tip Income Program (ATIP) in January of this year in an effort to simplify and encourage tip reporting for small- and medium-sized food and beverage establishments. This formula-based tip reporting program, which is currently a three-year, voluntary pilot program, should ease some of the burdens of other tip reporting programs on smaller businesses.