11 January 2016 Tax extenders bill amends various code provisions applicable to exempt organizations On December 18, 2015, President Obama signed into law a bill, the Protecting Americans from Tax Hikes Act of 2015 (the Act). The Act includes several new provisions affecting tax-exempt organizations. In addition, the Act makes permanent a number of federal tax provisions that are beneficial to certain tax-exempt organizations. New provisions affecting tax-exempt organizations Previously, organizations intending to operate under Section 501(c)(4) were not required to file an exemption application, but could "self-declare" exempt status or complete Form 1024 (Application for Recognition of Exemption Under Section 501(a)) in order to receive an IRS determination letter recognizing their exempt status. The Act repeals the voluntary application process for Section 501(c)(4) organizations and requires social welfare organizations to notify the IRS of their intent to operate under Section 501(c)(4). The Act provides that organizations seeking Section 501(c)(4) status after December 18, 2015, must, within 60 days of forming, provide the IRS with notice of their formation and their intent to operate as a Section 501(c)(4) organization. The notice must include: (1) the organization's name, address, and TIN; (2) the date on which and state in which the entity was organized; and (3) a statement explaining the organization's purposes. There will also be a user fee required with this notice. Within 60 days after submitting an application, the IRS is required to provide a letter of acknowledgment of the registration. This notice does not, however, grant the organization a favorable determination. If the organization seeks a favorable determination letter, it must complete and submit an exemption application. Organizations intending to operate under Section 501(c)(4) formed after December 18, 2015, are subject to the new requirements. Additionally, Section 501(c)(4) organizations formed on or before the Act's enactment date (December 18, 2015) that have never filed a Form 1024 or at least one Form 990-series return or notice are also subject to the new notice requirements, but such organizations are given 180 days from December 18, 2015, to file the notice of registration with the IRS. The notice of formation requirements do not apply to organizations that applied for recognition of their Section 501(c)(4) status on or before December 18, 2015. Any entity that fails to timely file a notice is subject to penalties of $20 per day, up to $5,000. Currently, if the IRS denies the exemption application of an entity seeking recognition under Section 501(c)(3) or indicates that the entity's exempt status is in jeopardy, the entity may seek a declaratory judgment. The Act extends this availability of a declaratory judgment remedy to initial determinations and continuing classifications of Section 501(c)(4) entities and other exempt organizations. The Act requires the IRS to provide procedures through which a Section 501(c) entity may ask the IRS Office of Appeals to review an adverse determination relating to qualifying exemption under Section 501(a) or Section 170(c)(2), or classifying an entity as a private foundation under Section 509(a) or as a private operating foundation under Section 4942(j)(3). The provision is retroactive to determinations made after May 19, 2014. The Act provides that contributions of money or property made after December 18, 2015, to organizations described in Section 501(c)(4), Section 501(c)(5) or Section 501(c)(6) are not subject to gift tax. The Act provides that certain agricultural research organizations will now be treated under Section 170(b)(1)(A) much like medical research organizations have been treated. Therefore, qualifying agricultural research organizations will be considered to be public charities and certain charitable contributions to these entities will qualify for the 50% deduction limitation under Section 170(b)(1)(A). The Act also makes permanent a number of federal tax provisions that directly affect tax-exempt organizations: The Act makes permanent the favorable tax treatment of certain payments by controlled entities to exempt organizations.Section 512(b)(13) generally treats certain payments (interest, rent, royalties and annuities) paid to tax-exempt organizations from controlled entities as unrelated business taxable income. With regard to any payments made under binding contracts in effect on August 17, 2006 (or a renewed contract with substantially similar terms), Section 512(b)(13) applies only to the portion of payments that exceed an arm's-length price (as determined under Section 482), and in addition to the tax, a 20% penalty applies to this excess. The Act reinstates this rule and makes it permanent for payments received or accrued after December 31, 2014. Certain items of loss and deduction incurred by an S corporation reduce the basis of the shareholder's stock in the S corporation. When an S corporation contributes property to a charity, only the shareholder's pro rata share of the S corporation's adjusted basis in the donated asset will be used to reduce the shareholder basis, even though the full fair market value is deducted as a charitable deduction. This basis reduction rule is made permanent under the Act and is effective for charitable contributions made in tax years beginning after December 31, 2014. Under Section 408(d)(8), a taxpayer who is aged 70.5 or older may exclude up to $100,000 from gross income for qualified charitable distributions made from an IRA. Spouses can each make their own separate contribution. The distribution must be made directly to a charitable recipient that is recognized by the IRS as tax-exempt. Distributions to some charitable organizations, however, such as certain private foundations, Section 509(a)(3) supporting organizations and donor advised funds, are not excludible from gross income under Section 408(d)(8). Additionally, Section 408(d)(5) allows taxpayers to apply charitable distributions towards their minimum distribution requirements. The Act makes permanent the increased charitable deduction limit of 50% and the 15-year carryforward period under Section 170(b)(1)(E) for contributions by individuals or corporations of a real property interest for conservation purposes. The Act makes permanent the provision of Section 170(e)(3)(C), which permits businesses to claim an enhanced charitable deduction for contributions of excess food inventory made after December 31, 2014. Further, for tax years beginning after December 31, 2015, the Act raises the deduction limit for taxpayers other than C corporations from 10% to 15%, adds a 15% taxable income limitation for C corporations, establishes a five-year carryover period for excess contributions, establishes rules for coordination of overall corporate charitable contribution limitations, creates rules for determining basis for certain taxpayers who do not account for inventories under Section 471, and establishes rules for determining fair market value for certain nonmarketable wholesome food items. The Act adopts and modifies several federal tax provisions affecting tax-exempt organizations. Specifically, organizations that intend to operate under Section 501(c)(4) can no longer self-declare their exempt status without notifying the IRS. Rather, such organizations must submit a one-page notice of registration to the IRS within 60 days of formation. Additionally, all existing Section 501(c)(4) organizations that have not filed Form 1024 or at least one Form 990 must file the one-page notice of registration with 180 days of December 18, 2015. The IRS is required to provide a letter acknowledging receipt of the registration within 60 days of receiving the notice. This acknowledgement letter, however, does not grant the organization Section 501(c)(4) status. Rather, an organization that seeks a favorable exemption determination letter from the IRS must still complete and submit an exemption application. Penalties of $20 per day (up to $5,000) will apply to all organizations that fail to timely file the notice of registration with the IRS. Organizations that operate or seek to operate under Section 501(c)(4) should carefully review the registration requirements to ensure that they are in compliance. The Act also imposes new procedural requirements which offer clarity to certain tax-exempt organizations facing adverse determinations. Specifically, the Act requires the IRS to create and adopt administrative appeal procedures for tax-exempt organizations facing an adverse determination. The Act also enables tax-exempt organizations or organizations seeking tax-exempt status to obtain declaratory judgments from a federal court, a right that formerly was only available to 501(c)(3) organizations or applicants. This remedy provides greater recourse to organizations that have not received final determination letters from the IRS or whose tax-exempt status has been revoked or denied. Lastly, several of the permanent extensions in the Act encourage charitable giving. Individuals and businesses are offered unique incentives to make contributions of cash or property to tax-exempt organizations. As such, these provisions operate to provide tax-exempt organizations with additional sources of funding. Furthermore, the Act's confirmation that gift taxes do not apply to contributions to Section 501(c)(4), (c)(5) and (c)(6) organizations provides greater certainty to donors making contributions to such organizations. Tax-exempt organizations should carefully review the Act and make sure they comply with the modifications and changes to law. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg
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