United States: Tax Reform Act Of 2014 And The Charitable Deduction

Last Updated: October 17 2014
Article by John Sare and Lauren Simpson

Laws and Regulations

Representative Dave Camp, the current chair of the House Ways and Means Committee (the "Committee"), introduced a discussion draft of the Tax Reform Act of 2014 (the "Camp Bill") on February 26, 2014. Although it is widely predicted that the Camp Bill will not pass, exempt organizations should still examine it closely, because it is emblematic of a new trend in legislative proposals dealing with tax reform.

Changes at the margins of the tax law have occurred several times in recent years, but wholesale reform has not been politically feasible, and perhaps still isn't. By offering up a Bill containing scores of reforms, large and small, Representative Camp may simply have been hoping to provoke debate and enough legislative and public momentum for some of his less significant proposals – and maybe even a few of the major ones – to become law.

Exempt organizations should take particular note of this approach, because the charitable deduction is one of the provisions marked for change, and it may be one of the easier targets. The Camp Bill does not attempt to eliminate the deduction altogether, as past proposals have done, but it does propose major alterations, and we will likely see variations of these in future legislative proposals.

Under current law, individual taxpayers may take itemized deductions for charitable contributions, and those deductions are limited to certain percentages of an individual's adjusted gross income, or AGI. To take the deduction for a particular year, a donor must make the gift by December 31 of that year.

The Camp Bill envisions multiple changes to these basic rules. First, taxpayers would be allowed to deduct contributions made after the end of the tax year but before the due date of their returns (generally, April 15).

Second, the AGI limitations would be simplified and lowered. Currently, cash contributions to public charities and private operating foundations may be deducted up to 50% of the donor's AGI, and contributions of capital gain property to public charities and certain private foundations may be deducted up to 30% of the donor's AGI. Under the Camp Bill, both categories of contribution would be deductible up to 40% of the donor's AGI.

Additionally, for gifts of cash or capital gains property to private non-operating foundations, the AGI limitation would be changed to 25% from the current 30% and 20% limitations.

Thirdly, the Camp Bill would impose a 2% "floor" on the charitable contribution deduction, even for itemizers. An individual's charitable contributions would be deductible only to the extent they exceed 2% of the individual's AGI.

The rules for determining the value of the deduction for property contributions would also change under the Camp Bill. The amount of a charitable deduction for donated property would generally be the adjusted basis of the contributed property (as opposed to the property's fair market value).

There are a few exceptions: for certain types of property, the Camp Bill would permit a deduction of the fair market value of the property minus any ordinary gain that would have been realized had the donor sold the property at that fair market value. These types of property include tangible personal property related to the purpose of the donee exempt organization (e.g., artwork donated to an art museum), qualified conservation contributions, and publicly traded stock.

As a consequence, donors of real property and illiquid securities could find themselves able to deduct only their basis – a limitation that, under current law, applies only when the charitable donee is a private foundation.

Finally, the Camp Bill would make permanent the temporary rules for contributions of conservation easements. Generally, deductions for contributions of conservation easements would be limited to 40% of AGI, but farmers and ranchers would still be allowed a deduction of up to 100% of AGI for contributed property used in agricultural or livestock production, and no deduction would be allowed for land reasonably expected to be used as a golf course.

The impact of these changes on exempt organizations nationwide could be severe: a new study released by the Urban-Brookings Tax Policy Center and the Urban Institute Center on Nonprofits and Philanthropy claims that the Camp Bill, if passed, would cut charitable giving in the U.S. by as much as $17 billion to $34 billion per year. However, these figures are in sharp dispute; the introductory press release from the Committee claimed that the Camp Bill would actually increase charitable giving by $2.2 billion per year.

Though the Camp Bill itself seems destined to go nowhere, the ideas in it are informing an ongoing public policy discussion in Washington. Those ideas will likely find their way into new tax bills, and the debate about the financial impact of those ideas on charity can be expected to continue. We will keep you informed about noteworthy developments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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