Extenders Made Permanent in PATH Act

We continue to blog about the Protecting Americans from Tax Hikes Act signed into law by the President on December 18. Today a note on aspects of the tax extender provisions affecting nonprofits.

The big news is that Congress has removed an annual headache for many taxpayers and nonprofit organizations by removing the expiration dates for several provisions that have been subject for years to the whims and uncertainties of the annual legislative process (sections 111-115 of the Act, explained here, pages 12-25). These special charitable tax breaks are for contributions of conservation easements, distributions from an IRA to charity, and business contributions of food inventory. Two other provisions relate to contributions by S Corporation shareholders and the general (nontaxation) of payments by controlled subsidiaries of a charity to the (parent) charity.

Much as it is easy to welcome certainty, in some ways it was appropriate for these tax provisions to be up for renewal every year, just like a regular appropriation. When tax expenditures like these become non-expiring (a.k.a. permanent), there is a dark side: the spending they represent becomes more like entitlement spending, a fixture of the tax code. And even worse (or better, depending on your point of view), as a tax expenditure, they escape notice in the regular budget as “spending,” making them more immune to change.

“Permanence” of course is relative, as Congress could eliminate some of these tax-spending provisions as part of tax reform. Indeed, maybe now with the annual extender dance reduced in significance, Congress will fill the legislative vacuum with a serious tax reform effort.

As to the merits of the now non-expiring provisions, a few warrant comment. One of the more unfortunate provisions relates to conservation easements. Professor McLaughlin has already made the point (posted below) that the conservation easement tax expenditure is laden with problems. It is cavalier for Congress permanently to expand a remarkably generous tax incentive without any effort to improve known difficulties. One of the reasons provisions are made temporary in the first place is uncertainty on the underlying policy. When that uncertainty remains, why make the policy permanent?

The IRA distribution provision is the most significant in terms of revenue and as a charitable giving measure. Permanence for this incentive is both a victory and a defeat for advocates, however. The victory is obvious, in that now charities can reliably market the ability to transfer up to $100,000 annually from an IRA (upon age 70.5) to charity without tax consequence. This is good for charity, as the exclusion is available for planning purposes and it makes available funds for donation that otherwise donors might withhold. So that’s a good feature. There are costs though, not just in terms of revenue, but IRA donors get more than just avoidance of the percentage limitations. Donors also can ignore the IRA distribution in calculating their adjusted gross income (AGI), which means a nominally lower AGI. This can mean that donors become eligible for tax benefits that have nothing to do with charitable giving but are based on maintaining a relatively low AGI (e.g., avoiding phaseouts). Thus, the provision represents a way IRA owners can get around rules that apply generally, including the charitable percentage limitations. Why favor IRA owners over others?

The provision is a defeat for advocates however, in that many had hoped that the $100,000 annual cap on the exclusion would be removed and that eligible donees would include donor advised funds, supporting organizations, and private foundations. Evidently, Congress has decided that policy issues remain unresolved for these more passive grant-making forms of giving. We can expect these issues to recur.

It might be tempting to conclude that Congress decided not to expand the IRA distribution provision because all it wanted to do here was just a straight extension, i.e., no changes or expansions to the underlying provision. But oddly enough, Congress opted to expand other extenders. The biggest expansion was for the enhanced deduction for food inventory. One change allows business donors to base their inventory deduction on a fake value. When the business donor is unable to sell the food inventory because of “internal standards,” a “lack of market” or “similar circumstances,” then the donor may donate the inventory and determine value by ignoring the lack of a sales market or the donor’s internal standards. The well-intentioned general idea is that donors with days-old bread do not have to value the bread as if it is days old, but instead can pretend for tax purposes that it is fresh. This means a higher deduction. The question is whether this increased cost for taxpayers really means that charities are getting more and better donations, or whether businesses will just get bigger deductions and charities lower quality items (but valued as higher quality items). Donors had been lobbying for this provision since the last century, and finally succeeded. Inventory contributions (not just food) are an area where data is sparse and concerns about abuse and the benefits to charity are real. (See discussion here, about donated coconut M&Ms, among other things, pages 311-317.) But as with conservation easements, expansion without serious consideration of reform won the day.

Roger Colinvaux