Protecting Americans from Tax Hikes Act of 2015 to affect most tax-exempt entities
The sweeping $680 billion tax deal enacted in December made permanent and enhanced many of the tax benefits that help not-for-profit entities, but it also brought new restrictions and reporting requirements.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) will affect most tax-exempt entities, including those involved in higher education, community development, conservation, social services and health care. The PATH Act makes permanent many of the tax provisions that encourage charitable giving, providing a boost to organizations that rely on donations. The bill also changes several benefit plan and information reporting requirements applying to tax-exempts and makes a number of significant changes affecting higher education institutions.
Download the Tax Insights report
on The Path Act (PDF).
The tax code provides significant incentives to encourage charitable giving, but many of these provisions had been temporary and available only under short-term extensions. The provisions were often extended only retroactively, undermining their incentive effect. These provisions last expired at the end of 2014. The PATH Act reinstates, makes permanent and even enhances the following provisions that encourage giving to various types of organization:
Benefit plans and information reporting
Tax-free distributions from IRAs — The bill makes permanent the provision allowing taxpayers age 70½ and older to make annual tax-free distributions of up to $100,000 from an individual retirement account (IRA) directly to charity. The frequent restorative extension of this provision had made it difficult for taxpayers to use it, so the new permanent extension could help increase giving.
S corporation basis adjustments for charitable contributions — The bill makes permanent the rule allowing favorable basis adjustments for shareholders of an S corporation after a charitable donation of property. Tax-exempts that rely on the donations from privately held business could see increased help now that S corporation owners have assurance regarding the tax treatment of contributions of property.
Charitable deductions for food inventory — The bill makes permanent the enhanced deduction for contributions of food inventory. In addition, it enhances the deduction by increasing the charitable percentage limitation to 15% (with exceptions) and allowing contributions in excess of 15% to be carried forward for five years. It also includes presumption on the tax basis and valuation of food inventory. The provision should help food banks and other social service not-for-profits.
Conservation easements — The bill makes permanent the increased percentage limits and extended carryforward period for qualified contributions of conservation easements. It also includes a special rule extending the enhanced benefit for farmers and ranchers to Alaska Native Corporations. The changes should help conservation organizations. The temporary nature of the enhanced deduction and its frequent short-term and retroactive extensions made past tax-planning on these complex transactions difficult for donors.
While not-for-profits typically do not pay income tax, they still must comply with the extensive rules on benefit plans and information reporting that affect all businesses. The PATH Act makes three significant changes that affect tax-exempts:
Parity for the transit fringe benefit exclusion — The bill makes permanent and reinstates the increased exclusion from income for employer-provided mass transit benefits. The allowable fringe benefit for transit is now equal to the parking allowance and indexed for inflation. The monthly limit on the exclusion for combined transit pass and vanpool benefits is now $250 in 2015 and $255 in 2016. The IRS has already released procedures for employers to claim payroll tax refunds for 2015 transit benefits provided in excess of the previous $130 limit.
Accelerating reporting on remuneration — The bill requires employers to file employee wage and nonemployee compensation statements (Forms W-2, W-3 and 1099-MISC) to the IRS and Social Security Administration by Jan. 31, a day before they are due to recipients. The forms were previously not due to the agencies until the end of February if filing on paper and the end of March if filing electronically. The provision is effective for calendar year 2016 returns to be filed in 2017.
Safe harbor for de minimis errors on information returns — The bill creates a new de minimis safe harbor so that any single reporting error of less than $100 or withholding error of $25 is not penalized and does not need to be corrected. The provision takes effect for information returns and payee statement furnished after Dec. 31, 2016.
The PATH Act enhances and makes permanent many of the generous tax benefits for those pursuing a higher education, but it comes at a price for the institutions, which now face new reporting requirements. The provisions that will help students fund their education include the following:
American Opportunity Tax Credit — The bill makes the American Opportunity Tax Credit (AOTC) permanent. The AOTC was scheduled to expire and revert to the Hope Scholarship credit at the end of 2016. It provides a 100% credit on the first $2,000 of qualified tuition and related expenses, and 25% on the next $2,000. It is partially refundable, available for up to four years per student and has a higher phaseout threshold than the Hope Scholarship Credit. Unfortunately, the provision comes with new restrictions. Students must receive a Form 1098-T with a valid employer identification number (EIN), and educational institutions have new reporting rules, discussed in the following.
Above-the-line deduction for qualified tuition and related expenses — The bill retroactively reinstates the above-the-line deduction for expenses related to higher education for 2015 and extends it through the end of 2016.
Section 529 plans — The bill expands Section 529 plans by making computer and related costs eligible, segregating distributions from separate accounts for determining if they are included in income and exempting tuition refunds from tax if recontributed to the plan within 60 days.
In addition, the bill clarifies the charitable status of the qualifying agricultural research organizations tied to colleges and universities, and allows certain payments received by students at a qualified work college to be excluded from gross income. The bill also imposes the following new reporting requirements on higher education institutions:
New markets tax credit
ITIN rules — The bill includes new rules for individual taxpayer identification numbers (ITINs) that affect the colleges and universities that are eligible acceptance agencies for ITIN applications. The bill clarifies the ITIN application process and institutes ITIN audit requirements and other procedures to ensure the accuracy and the effectiveness of the application. It will also automatically expire certain unused ITINs and require renewals on a staggered schedule.
AOTC reporting — The bill pairs the new requirements for students claiming the AOTC with new reporting rules. Educational institutions are now required to provide their EINs on the Form 1098-T for expenses made after Dec. 31, 2015, for academic periods beginning after that date. Higher education institutions are also now required to report on Form 1098-T only the aggregate amount of qualified tuition and related expenses received during the calendar year. The provision eliminates the option to report the amount billed for qualified tuition and related expenses, and is effective for expenses paid after Dec. 31, 2015, for education furnished in academic periods beginning after Dec. 31, 2015.
The bill extends the new market tax credit for five years through 2019 with an annual allocation of $3.5 billion. It also extends the carryover period for unused new market tax credits for five years, through 2024. The credit remains available to taxpayers investing in the stock of a corporation or a capital interest in a partnership directly from a qualified community development entity.
Many of the changes are already effective for the 2016 tax year, and non-for-profits must ensure they comply with these rules immediately. Some of the other provisions may create new fundraising opportunities and future reporting challenges.
Organizations should begin immediately considering how the changes affect them.
Download the Tax Insights report
on The Path Act (PDF).
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