On October 22, President Bush signed the American Jobs Creation Act of 2004. Included as part of that legislation were a number of changes in federal tax laws that may have an impact on the fund-raising efforts of some nonprofits. The changes were intended to raise revenue by limiting charitable deductions for certain types of gifts and tightening documentation requirements for others. What follows is a summary of the primary provisions of the Act. See H.R. 4520 at http://thomas.loc.gov/ for the full text of the legislation.
Gifts of patents
The new law provides that gifts of patents will be deductible at the lower of either their fair market value or the cost of creating the patent. This is a change from existing law that allowed deductions in some cases for the full fair market value of a patent. This change results in equalizing the tax treatment of gifts of copyrights and patents.
Gifts of copyrights have long been limited to the lesser of cost basis or fair market value. The new law does, however, provide for the possibility of deducting future income generated by a gift of a qualified patent or copyright on a sliding scale to the extent it exceeds the amount of the initial deduction. In some instances, a deduction may be allowed under this scale for up to 12 years. These provisions apply to gifts made after June 3, 2004. For additional information see Section 882 of the new law.
Changes in qualified appraisal rules
For many years, taxpayers have been required to obtain appraisals for gifts of appreciated assets valued at more than $5,000 ($10,000 for gifts of closely held securities). The new law extends this requirement to gifts by C Corporations. It also requires that the qualified appraisal be attached to returns where a deduction is claimed for donations of property valued at $500,000 or more. Section 883 of the law deals with these changes, which are also effective for gifts completed after June 3, 2004.
Gifts of automobiles, boats, and airplanes
Under existing law, donors of automobiles, boats, and airplanes were allowed to take a deduction for what they determined to be the fair market value of the donated property unless it was worth more than $5,000, in which case they were required to obtain a qualified appraisal. Beginning January 1, 2005, donors of such gifts must limit deductions to the amount actually received by the charitable recipient. Proof of the amount received must be included with the tax return on which the deduction is claimed. The treatment afforded such gifts is somewhat similar to provisions that require charities to report the amount received for sales of property subject to qualified appraisal rules when property is sold within two years of the donation. The difference is that charities must re-port to the donor and the government the amount received from the sale of a donated automobile, boat, or airplane within 30 days of sale. See Section 884 of the new law for provisions covering contributions of vehicles.
Provisions not included
Of interest to charitable gift planners is the fact that, while Congress addressed charitable giving in this Act, it did not include provisions of the CARE Act that would have encouraged gifts of retirement plan assets and allowed nonitemizers to deduct a portion of their gifts.
Several versions of the CARE Act have been introduced in recent years, and all would allow taxpayers to make outright and deferred gifts of certain retirement fund assets to charity on a tax-favored basis. These provisions are expected to once again be included in bills that will be introduced in the 109th Congress next year. In the meantime, see page 2 of this issue of Give & Take for questions and answers about gifts from IRAs and other retirement plans and how they may be completed most advantageously while we await Congressional action on the CARE Act.
Learn more about the new tax act and other important issues at “An Introduction to Planned Giving” in Memphis on December 2-3 and in New York City on January 24-25, 2005. See page 3 for more information and page 8 for a complete listing of Sharpe seminars in 2005.