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Provisions Concerning Exempt Organizations in Financial Bailout Bill
President Bush signed into law H.R. 1424, on Friday October 3, 2008.
Provisions affecting exempt organizations are included in the financial bailout bill (H.R. 1424, the
Emergency Economic Stabilization Act of 2008) approved by the Senate on October 1, 2008, and approved by the House today.
The following discussion provides an overview of items of interest to exempt organizations under the tax and tax extender provisions in the financial bailout bill. The energy tax provisions and revenue offsets in H.R. 1424 are not included in this preliminary discussion.
- IRA charitable contribution provision: Taxpayers would be allowed to make tax-free contributions from their IRA plans to qualified charitable organizations through 2009.
- Modification of tax treatment of certain payments to controlling exempt organizations: In general, interest, rent, royalties, and annuities paid to a tax–exempt organization from a controlled entity are treated as unrelated business income of the tax-exempt organization. If, however a payment to a tax-exempt organization by a controlled entity is less than fair market value, the payment would be excludable from the tax-exempt organization’s unrelated business income. The bill would extend this treatment to the end of 2009, for payments received or accrued after December 31, 2007.
- Enhanced charitable deduction for qualified computer contributions: The bill would extend for two years, through 2009, an enhanced deduction for contributions of computer equipment and software to elementary, secondary, and postsecondary schools.
- Enhanced charitable deduction for food inventory: The bill would extend for two years, through 2009, a provision allowing businesses to claim an enhanced deduction for the contribution of food inventory. The bill also would eliminate the percentage limitation for contributions made by certain farmers and ranchers after December 31, 2007, but before January 1, 2009.
- Enhanced charitable deduction for contributions of book inventory to schools: The bill would extend a provision that allows C corporations an enhanced charitable deduction for donations of books to schools, public libraries and literacy programs, to the end of 2009 for contributions made after December 31, 2007.
- Temporary suspension of charitable contribution limits, increased standard mileage rate, and non-taxable mileage reimbursements: Provisions in the bill are intended to provide Midwestern disaster relief. The bill would temporarily waive the 10% / 50% adjusted gross income limits that apply for charitable deductions by corporations and individuals, respectively (up to December 31, 2008); would set the charitable mileage rate at 70% of the current standards business mileage rate for taxpayers assisting in Midwestern disaster relief efforts; and would not treat reimbursements for charitable mileage up to the standard business mileage rate as taxable income.
- Qualified tuition deduction: An above-the-line tax deduction of $4,000 or $2,000 (depending on income limits) would be allowed for qualified higher education expenses through 2009.
Financial Bailout Tax-Related Provisions
- Treatment of gain/loss from sale or exchange of certain preferred stock by financial institutions as ordinary income/loss: Gain or loss by an “applicable financial institution” from sale or exchange of “applicable preferred stock” in Fannie Mae or Freddie Mac would be treated as ordinary income or loss.
- Golden parachutes: The bill would limit deductions for compensation of the top five executives of certain institutions that sell troubled loans to the federal government to $500,000 a year. Certain severance payments to such executives, upon an involuntary termination of the executive or bankruptcy of the institution, would be treated as a nondeductible golden parachute payment, and the executive would also potentially be subject to a 20% excise tax.
- Exclude from gross income discharge of acquisition indebtedness on principal residences: The bill would extend for three additional years the exclusion from gross income of “qualified principal residence indebtedness.”
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Extenders and Other Provisions from H.R. 6049
AMT Relief
- Alternative minimum tax (AMT) patch: The bill would increase the exemption amounts to $46,200 (single taxpayers) and $69,950 (married filing jointly) for 2008 and allow the personal credits against AMT. The amounts of the AMT “patch” that expired at the end of 2007 were $44,350 and $66,250, respectively.
- Extend and modify AMT credit allowance against incentive stock options (ISOs): The bill would allow 50% (instead of 20%) of long-term unused minimum tax credits as a refundable AMT credit over each of two years (instead of over each of five years), eliminate the income phase-out, and abate any underpayment of tax outstanding on the date of enactment related to ISOs and the AMT including interest.
Individual Taxpayer Provisions
- State and local sales tax deduction: The bill would extend to the end of 2009 the provision that allows taxpayers who elect to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state income taxes.
- Teacher expense deduction: An above-the-line deduction of up to $250 would be allowed to teachers for educational expenses through 2009.
- Additional standard deduction for real property taxes: For taxpayers who do not itemize, a real property tax deduction would be allowed for the lesser of the amount allowable as a deduction of state and local and foreign real property taxes, or $500 ($1,000 in the case of a joint return) through 2009.
- Treatment of dividends of Regulated Investment Companies (RICs):
The proposal would extend the treatment of interest-related dividends and short-term capital gain dividends received by a RIC to tax years of the RIC beginning before January 1, 2010.
- Estate tax look-through for RIC stock held by nonresidents: The bill would allow the estate tax look-through rule for RIC stock to apply to estates of decedents dying before January 1, 2010.
- Extend the treatment of RICs as “qualified investment entities”: The bill would extend the inclusion of a RIC within the definition of a “qualified investment entity” under section 897 of the Code through December 31, 2009.
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Business Tax Provisions
- Research and development (R&D) credit: Effective for amounts paid or incurred after 2007, the bill would:
- Extend the research tax credit equal to 20% of the amount by which a taxpayer’s qualified research expenses for a tax year exceeds its base amount for that year
- Extend current law to the end of 2009
- Increase the alternative simplified credit from 12% to 14% for the 2009 tax year
- Repeal the alternative incremental research credit for the 2009 tax year
- New markets tax credit: The credit for taxpayers who hold a qualified equity investment on a credit allowance date would be extended through 2009. The proposal is effective for investments made after December 31, 2008.
- Exception under Subpart F for active financing income: The U.S. parent of a foreign subsidiary engaged in a banking, financing, or similar business is eligible for deferral of tax on the subsidiary’s earnings if the subsidiary is predominantly engaged in and conducts substantial activity with respect to such business. The subsidiary must pass an entity level income test to demonstrate that the income is active income and not passive income. The provision expires December 31, 2008. The proposal would extend the provision to the end of 2009. The proposal is effective for tax years beginning after December 31, 2008.
- Look-through treatment of payments between related CFCs under the foreign personal holding company rules: The bill would extend through 2009 a deferral for certain payments (interest, dividends, rents and royalties) between commonly controlled foreign corporations (CFC), for tax years beginning after December 31, 2008.
- 15-year straight-line cost recovery for qualified leasehold, restaurant and retail improvements: The bill would extend the 15-year cost recovery of certain leasehold improvements and restaurant property (instead of 39 years) from property placed in service in 2008 or 2009. Newly constructed restaurants and improvements to retail space placed in service in 2009 would also be allowed a 15-year cost recovery.
- Basis adjustment to stock of an S corporation making charitable contributions of property: If an S corporation makes a contribution to a charity, shareholders must reduce the basis in their stock by their pro rata share of the fair market value of the contribution. Under the bill, the amount of a shareholder’s basis reduction in the S corporation stock would be equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. The proposal would extend the provision to the end of 2009 and would make a technical correction clarifying the application of this provision.
- Temporary increases in limit of cover over of rum excise tax revenues to Puerto Rico and the Virgin Islands: The bill would extend the increased excise tax payments Puerto Rico and the Virgin Islands of the excise tax on rum imported into the United States to the end of 2009.
- American Samoa economic development credit: The bill would extend a possessions tax credit for certain domestic corporations operating in American Samoa to the end of 2009.
- Mine rescue team training credit: A credit of up to $10,000 for the training of mine rescue team members would be extended to the end of 2009.
- Election to expense advance mine safety equipment: The bill would extend the 50% immediate expensing treatment for qualified underground mine safety equipment to the end of 2009.
- Deduction for section 199 domestic production activities in Puerto Rico: The bill would extend a provision allowing a section 199 domestic production activities deduction for activities in Puerto Rico, to the end of 2009.
- Qualified Zone Academy Bonds (QZABs): The bill would allow another $400 million of issuing authority to state and local governments for 2008 and 2009 for qualified zone academy bonds.
- Indian employment credit: The proposal would extend through 2009 a business tax credit for employers of qualified employees that work and live on or near an Indian reservation.
- Accelerated depreciation for business property on Indian reservation: The bill would extend the placed-in-service date for a special depreciation recovery period for qualified Indian reservation property to the end of 2009.
- Extend and expand 50% tax credit for certain railroad track maintenance expenditures: The bill would extend to the end of 2009 the 50% railroad maintenance credit provided for Class II and Class III railroads (short-line railroads) and allows the credit against the AMT.
- 7-Year recovery period for motorsports racetrack property: The bill would extend the special 7-year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes, to the end of 2009.
- Expensing of “Brownfields” environmental remediation costs: The bill would extend the expensing of costs associated with cleaning up contaminated sites to the end of 2009.
- Extend Work Opportunity Tax Credit (WOTC) for Hurricane Katrina employees: The bill would extend through August 28, 2009, the work opportunity tax credit for those employed within the Hurricane Katrina core disaster area.
- Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone: The increased rehabilitation credit within the Gulf Opportunity Zone—from 10% to 13% of qualified expenditures for any qualified rehabilitated building other than a certified historic structure and from 20% to 26% of qualified expenditures for any certified historic structure—would be extended through 2009.
- Tax incentives for investments in the District of Columbia: The bill would extend through the end of 2009 special tax incentives for the designed enterprise zone in the District of Columbia and also a $5,000 credit for first-time home buyers in the District of Columbia.
- Wool Trust Fund: The bill would extend a provision that reduces import duties on a limited quantity of imported wool fabrics and places duties otherwise collected on the import of certain wool products into the Wool Trust Fund, for five years.
Other Tax Provisions
- Special expensing rules for film and television productions: The bill would extend a provision allowing a producer to elect to take a single-year deduction of up to $15 million in production costs incurred in the United States ($20 million if the costs are significantly incurred in economically depressed areas) to the end of 2009, regardless of the ultimate cost of the film.
- Child tax credit: The refundable threshold for the child tax credit would be $8,500 for the 2008 tax year.
- Expanded application of section 199 for film and television productions: Many film and television show production companies have been unable to take advantage of the domestic production deduction. The bill would allow more film and television show production companies to use the domestic production deduction.
- Excise tax exemption for wooden practice arrows used by children:
The bill would exempt from the excise tax certain arrow shafts consisting of all natural wood with no laminations or artificial means of enhancement.
- Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008: The bill would require private insurance plans that offer mental health benefits as part of the coverage to offer such benefits on par with the medical-surgical benefits.
- Income averaging for Exxon Valdez litigation amounts: The bill would allow commercial fishermen and other individuals whose livelihoods were affected by the 1989 Exxon Valdez oil spill to average any settlement or judgment-related income received in connection with pending litigation in the federal courts over three years for federal tax purposes.
- Certain farming business machinery and equipment treated as 5-year property: The bill would allow a 5-year recovery period for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer, if placed in service in 2009.
- Modification of penalty on understatement of taxpayer’s liability by tax return preparer: The bill would revise the standards for imposition of the tax return preparer penalty for returns prepared after May 25, 2007:
- The preparer standard for undisclosed positions would be reduced to “substantial authority.”
- The preparer standard for disclosed positions would be “reasonable basis.”
- With respect to tax shelters and reportable transactions to which section 6662A applies (i.e., listed transactions and reportable transactions with significant avoidance or evasion purposes), a tax return preparer would be required to have a reasonable belief that such a transaction was more likely than not to be sustained on the merits.
- Midwestern disaster area tax relief: The bill would provide tax relief for victims of Midwestern presidentially declared disasters (i.e., floods, severe storms, and tornadoes on or after May 20 and before August 1, 2008) in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin. For instance, the bill would waive in certain cases the 10% penalty tax if a distribution from an individual retirement account (IRA) or retirement plan is considered a qualified Disaster Recovery Assistance distribution. Other relief would be provided with respect to loans from qualified plans, suspension of the casualty loss limitation rules, special look-back rule for earned income credit and the refundable child credit, additional personal exemptions for housing victims, an exclusion for certain cancellations of indebtedness, and an extension of the replacement period for property lost due to floods or tornadoes, additional deprecation and expensing of qualifying property, and tax incentives for charitable giving among other items.
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For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or
rspeizma@kpmg.com
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