Pension Protection Act of 2006’s Impact on Charitable Giving

The recently enacted Pension Protection Act of 2006 (PPA) contains a package of provisions to help prevent abuse in the charitable sector and provide additional tax incentives for Americans to give more resources to the charitable community. Here is a brief overview of those provisions.

Charitable Giving Incentives

The Act contains a charitable giving incentives package designed to encourage charitable donations. The incentives include:

Tax-free distributions from IRAs for charitable purposes.

• The Act permits taxpayers who have reached age 70-1/2, to exclude from gross income certain distributions of up to $100,000 from a traditional individual retirement account (IRA) or Roth IRA which would otherwise be included in income.


• Eligible IRA owners can take advantage of this provision, regardless of whether they itemize their deductions.


• Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans are not eligible.

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• To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.


• Transferred amounts are counted in determining whether the owner has met the IRA's required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.


• The change is effective for two years through 2007.

Charitable deduction for contributions of food inventory.

• Under the Act, an enhanced deduction for donations of food inventory which was formerly available only to C corporations is extended to all trades and businesses, effective for two years through 2007.

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Basis adjustment to stock of S corporation contributing property.

• The Act provides that if an S corporation contributes property to a charity, an S corporation shareholder only has to reduce his basis in stock of the S corporation by his pro rata share of the adjusted basis of the contributed property, rather than by the amount of the charitable contribution that flows through to him.

• For example, if an S corporation with one individual shareholder makes a charitable contribution of stock with a basis of $200 and a fair market value of $500, the shareholder will be treated as having made a $500 charitable contribution and will reduce the basis of the S corporation stock by $200.


• The provision is effective for two years through 2007.

Qualified conservation contributions.

• The new law raises the limit on deducting contributions of capital gain property by individuals—from 30% of adjusted gross income to 50%—for qualified conservation contributions.

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• The charitable deduction limit is raised to 100% for qualified conservation contributions by individual and corporate farmers and ranchers, as long as the contribution includes a restriction that the land remain available for farming or ranching.


• Unused contributions can be carried forward for up to 15 years.


• The provision is effective for two years through 2007.

Other Changes to Charitable Donations

New rules for donations of clothing and household items.

• To be deductible under the Pension Protection Act (PPA), clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better.


• However, a taxpayer may claim a deduction of more than $500 for any single item, regardless of its condition, if the taxpayer includes a qualified appraisal of the item with the return.

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New recordkeeping requirements for cash contributions.

• Under the PPA, for contributions made in tax years beginning after Aug. 17, 2006, to deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution.


• A bank record includes canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date

Most individuals report on the calendar year so this change won't affect most individuals until 2007. For 2006, under the law that applies for tax years beginning before Aug. 18, 2006, calendar year individuals may back up their donations of money with personal bank registers, diaries or notes made around the time of the donation.

The new law does not change the requirement that a taxpayer get a written acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. IRS says, however, that one statement containing all of the required information may meet the requirements of both provisions.

We hope this information is helpful. If you would like more details about these or any other aspect of the new law, please do not hesitate to call.

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